A report issued recently by Guy Carpenter & Company, LLC, says that two economic problems — inflation and the global credit crunch — could put big-time pressure on the global casualty reinsurance industry, especially if a claim lag occurs.
The report first looked at monetary inflation, which it said may not be an immediate concern for reinsurers because a worldwide recession and depressed growth levels are containing inflation risk. However, "quantitative easing" by governments into the financial system could set the stage for inflation within a few years.
The report said that 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. It said that carriers could, 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 report also addressed the credit crunch caused by the subprime mortgage crisis and its effect on casualty reinsurance.
It said that there have been double-digit rate increases in a number of areas — including financial institution, professional indemnity, D&O, surety/trade credit, and political risk — though rates have remained relatively stable across most lines of business. Rate increases were attributed to poor loss experiences in specific lines, but a reinsurance capacity crunch may also have been a contributing factor.
The report said that a number of economic indicators point toward an increase in claim 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 claim 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 "claim lag" begins to catch up leading up to January 1, 2010.
"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," said George Carrington, global leader of professional liability specialty practice at Guy Carpenter.
"This could impact the market as we move toward January 1 renewal. Inflationary trends … also warrant close attention, especially for long-tail insurance programs."
The briefing, Casualty Specialty Update, is available in its entirety at www.gccpaitalideas.com.
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