Swiss Re’s Steinmann warns casualty ceding commissions “must come down” as inflation skyrockets

The upwards trend in ceding commissions across the casualty space “needs to come to an end” as reinsurers are increasingly challenged by the pricing environment, Swiss Re’s Thorsten Steinmann has said.

In conversation with The Insurer TV ahead of the Baden-Baden Reinsurance Meeting 2022, Swiss Re’s head of casualty underwriting for EMEA spoke of the urgent need to reduce ceding commissions as inflationary pressures feed into the casualty space.

“From our perspective, the ceding commissions in casualty must come down,” Steinmann said.

“This is a very broad and general statement, but when you think about what ceding commissions should be there for, they should be there to cover the cost – the acquisition cost – and the general expenses of our clients.”

He continued: “And we at the moment, at the ceding commission level, we pay as reinsurer a big, big override to the clients, and this needs to come to an end.”

Strong underlying economics over the past two years enabled reinsurers to offer higher ceding commissions. But as economic conditions make a U-turn, reinsurers are finding it increasingly difficult to justify this trend.

Many of the headwinds facing reinsurers as they approach the all-important 1 January renewals have been exacerbated by inflationary pressures.

Inflation has led to a further hardening of the property market, but this hardening has also started spreading across some casualty lines.

Steinmann made the distinction between economic inflation and social inflation, both of which have been adding to the headwinds across the casualty market.

Economic inflation will remain at around 5 percent going into 2023, he said, and mostly affects motor own damage due to increases in repair costs, spare part prices and rental car prices.

Meanwhile the effect of social inflation has spread beyond the US and is on course to reach pre-pandemic levels. To illustrate this, Steinmann pointed out that the annual growth rate of filed securities class actions stood between 15 percent and 19 percent, increasing by 2 percent annually, with more pronounced growth in EMEA.

“That is a significant problem that we are facing as long-tail reinsurers,” Steinmann added.

As a result of the rise of social inflation, Swiss Re has decreased its positions in large corporate US risks, a book “much, much smaller today than it was a few years ago”, he added.

Managing inflation

When asked how Swiss Re is protecting its book against the impact of inflation, Steinmann said the reinsurer is having discussions with its clients about structure, terms and conditions, and price.

Swiss Re has been increasing the attachment points for non-proportional programs in an effort to optimise the structure, and it has also been encouraging its clients to increase their deductibles and manage their limits, Steinmann said.

In addition, terms and conditions across most EMEA markets have been controlled by index clauses, or stability clauses, which have enabled Swiss Re to “share the burden between us and the client” amid different inflation scenarios.

Proportional programs have been benefiting from sliding scale commission schemes, he added.

And as inflation has caused expected losses to rise, it has put upwards pressure on pricing.

“We are making costing adjustments when it comes to inflation on a very regular basis. Prices for reinsurance will also have to go up on the non-proportional side,” Steinmann added.

Understanding clients has never been more important, which means reinsurers must work as closely as possible with them.

“We don’t do this [pricing] in a broad-brush approach, we really observe what our clients are doing, how they are increasing rate, how they are increasing the sum insured, how they manage their limits, and we obviously baked this also in our costing and when it comes to Swiss Re pricing,” Steinmann noted.

In this 10-minute interview, Steinmann provides further detail on:

  • Key themes expected at the Baden-Baden Reinsurance Meeting 2022
  • How inflation has impacted longer-tail casualty lines
  • How Swiss Re is adapting to inflationary challenges
  • Where the reinsurer is seeking new opportunities