Fitch’s Mazzuoli: Inflation and interest rate movements a “significant headwind” for reinsurance sector

A mixture of low interest rates and a prolonged period of higher-than-expected inflation could become a “significant headwind” for the global reinsurance sector and impact some firms’ ability to meet their cost of capital, warned Robert Mazzuoli, head of European reinsurance at Fitch Ratings.

Talking to The Insurer TV as part of #ReinsuranceMonth, Mazzuoli highlighted that while inflation has “picked up” in recent months, a rise in interest rates has now weakened which means inflation and interest rates are no longer “synchronised”.

He said this imbalance may cause a problem for the industry in the medium term, highlighting that successive years of rising inflation – between four and six years – would also impact wage inflation, medical inflation and litigation inflation, and hit portfolios of long-tail insurance lines.

“It can cause problems, in particular for the casualty lines of business and the long-tail lines of business, because here we will have a reserving issue and there will be a need to increase reserving for existing risks that are already on the books,” Mazzuoli explained.

“The question also arises whether the industry would manage to pass on higher inflation to their clients through higher prices,” he said.

“This is always a function of competition and of competitive pressures and so a mixture of low interest rates because of quantitative easing and a prolonged period of higher-than-expected inflation, that could become a significant headwind for the industry.”

In the US, inflation reached over 5 percent in August, up from just above 1 percent six months earlier, while in the UK, inflation is now pushing above the recommended 2 percent. In contrast, official interest rates in the major eurozone economies are either close to zero, or even negative.

Commenting on the outlook for 1 January, Mazzuoli forecast that pricing momentum will continue to slow down next year, adding that Fitch anticipates margin improvements of 2-3 percent this year and another 1-2 percent in 2022.

“Natural catastrophe is one example and cyber insurance is another one where we expect further price hikes, but the overall business in the overall portfolio we would expect that, adjusted for claims inflation, prices will move sideways next year,” he said.

He added that increased losses from secondary perils may lead to growing demand for insurance protection. However, Mazzuoli warned that increased losses – particularly those driven by climate-related risks – mean the industry must also rethink its risk appetite and pricing.

“It seems for now that, at least for the secondary peril events, that risk modellers and the reinsurance industry are grappling with the right models and the right pricing, and so we expect prices to move up again for property cat for the next couple of years,” he explained.

“It can be a good business for the industry if the pricing is right and then they can also take it on board their balance sheets. This is, I think, one of the main opportunities that they have. It is one of the main growth fields that we see in the market.”