Guy Carpenter Briefing Finds Rising Interest Rates Could Affect Reinsurers’ Claims-Paying Ability over Long Term

A briefing published today by Guy Carpenter & Company, LLC looks ahead to the possible effects of inflation on long-tail reinsurance, as well as the impact of the credit crunch on reinsurers in the wake of the subprime mortgage crisis. The briefing, Casualty Specialty Update, available at
www.gccapitalideas.com, examines the twin pressures that inflation and the global credit crunch are exerting on the global casualty reinsurance industry.

Source: Source: Guy Carpenter | Published on September 8, 2009

INFLATION AND LONG-TAIL REINSURANCE

• Monetary inflation may not be an immediate concern for reinsurers, with the worldwide recession and depressed growth levels containing the risk of inflation. However, “quantitative easing” by governments into the financial system could set the stage for inflation within a few years, especially in France, Germany and the United Kingdom.

• Inflation may pose a particular problem for long-tail insurers and quota share reinsurers, unless they have a sufficient time horizon before claims must be paid. Carriers can, however, invest the premium they receive and thus counteract the effects of inflation.

• Though rising inflation could impair the ability of insurers and reinsurers to pay claims, other“hidden” inflationary factors such as social inflation, legal inflation and medical costs inflation may not continue to grow at the same pace.

THE CREDIT CRUNCH AND CASUALTY REINSURANCE

• There have been double digit rate increases in a number of areas, including financialinstitution, professional indemnity, directors & officers (D&O), surety/trade credit, and political risk, though rates have remained relatively stable across most lines of business. Rate increases were largely due to poor loss experiences in specific lines, but a reinsurance capacity crunch may also have been a contributing factor.

• In Europe, the withdrawal of several reinsurers on financial lines liability treaties has had an impact in the amount of capacity available. At the same time, new carriers have emerged, looking to take advantage of the anticipated sellers’ market.

• A number of economic indicators point toward an increase in claims frequency, especially those related to corporate insolvencies. D&O claims, in particular, are likely to experience an increase in 2009 and 2010.

Although a relative lack of claims activity has led reinsurers to delay pushing for significant rate increases and tighter terms through the first half of 2009, the market could shift if the “claims lag” begins to catch up leading up to January 1, 2010.

George Carrington, Global Leader of Professional Liability Specialty Practice, Guy Carpenter, says:
“While the effects of the credit crunch and subsequent global financial crisis have been mitigated,
we still expect to see an uptick in corporate insolvency claims. This could impact the market as
we move toward January 1 renewal. Inflationary trends – particularly in Western Europe – also
warrant close attention, especially for long-tail insurance programs.”