Forex, inflation stoke re-insurance costs

Underwriters entering the 2025 business renewal season are facing high re-insurance costs due to foreign exchange crunch and inflation pressures.

Insurers usually purchase re-insurance coverages from both local and international markets in order to underwrite large-ticket risks.

But with forex crunch and high inflation, the insurance companies will need to revalue the premiums charged consumers to be able to secure reinsurance coverages. Failure to do this will lead to losses in the coming year, industry players say.

Reinsurance is insurance for insurers, which allows them to transfer some of their financial risk to other companies called reinsurers.

Insurers buy reinsurance to limit liability, stabilise losses, protect against catastrophes and increase capacity.

Tope Smart, group managing director/CEO, NEM Insurance Plc, said with renewals going on now, insurers are facing significant challenges driven by inflation and foreign exchange fluctuations.

He said these factors are directly impacting pricing, making the market increasingly difficult.

“With the ongoing pressure, we anticipate a tougher market environment, or what we call ‘hard market’ as we move into the New Year.

“The market remains hard, with pricing being impacted by ongoing inflation and fluctuations in foreign exchange rates. These factors have created a tougher climate than we have seen in recent years. The rising claims profile is also contributing to this, leading to stricter penalties for companies,” Smart said.

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He also said that given the recent trends and experiences, the market is proving to be more difficult than anticipated, reflecting the broader pressures of inflation and financial instability.

He however said that though the situation is challenging, it remains crucial that players navigate this landscape effectively to ensure success for all involved, both insurers and reinsurers.

Ken Aghoghovbia, deputy-managing director/chief operating officer, Africa Re, sharing his thought on this, said the challenges faced by local insurance companies in Nigeria, especially with respect to foreign exchange fluctuations and inflation, are a growing concern.

He said many insurers operate primarily in Naira, meaning they do most of their transactions in local currency and settle claims within the same.

However, the impact of foreign exchange comes into play when companies source their re-insurance coverage from international markets.

“Foreign exchange volatility poses a significant issue, as the amount paid to foreign re-insurers may seem small in comparison to their expected premiums, leading to reduced interest and potential delays. These delays can complicate the relationship between local insurers and their international counterparts, further complicating business operations,” he noted.

Aghoghovbia said reinsurers, responding to inflationary pressures, often demand higher capacity for coverage, meaning that the cost of re-insurance rises as well. This increase in premiums is passed on to local insurance companies and, by extension, to consumers.

“As insurers navigate these challenges, the need for adjustments in sums insured and premium rates becomes evident.

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“Ultimately, the combination of foreign exchange instability and inflation underscores the need for careful management of insurance policies and pricing strategies, ensuring that insurers remain competitive while offering adequate coverage to their clients amidst a fluctuating economic environment,” the Africa Re’s chief operating officer said.

According to him, reinsurers are encouraging local insurers to revalue insured assets to their current market values. But, specific to Nigeria, there are some underlying disciplines on pricing as both insurance and reinsurance companies have managed claims very well, he said.

For John Odah, an insurance broker, the insurance companies are facing mounting challenges as inflation and foreign exchange fluctuations drive up costs of reinsurance.

He said this shift is putting additional strain on the industry, forcing companies to reconsider their strategies for managing risk and safeguarding their financial stability.

“As the cost of securing reinsurance rises, insurers are left grappling with how to balance rising expenses with the need to maintain affordable coverage for their clients. This evolving landscape is reshaping the future of risk management, with far-reaching implications for both insurers and policyholders alike,” Odah said.

Experts at Munich Re, one of the leading Global reinsurers playing in the Nigeria market, said: “With more frequent and severe natural events, pricing must reflect underlying risks and incentivise risk mitigation. Sound market dynamics require efficient risk sharing between reinsurers and primary insurers,” Clarisse Kopff, member of the board of management, Munich Re, said.

The insured annual losses due to natural catastrophes worldwide now often exceed $100 billion. In the first half of 2024, they already reached $ 62 billion, significantly above the 10-year average of $ 37 billion.