Due to inflation pressures and the foreign exchange shortage, underwriters are confronted with high reinsurance costs as they begin the 2025 business renewal season.
To underwrite high-value risks, insurers typically buy reinsurance coverages from domestic and foreign markets.
However, due to high inflation and currency constraints, insurance companies will have to revalue their rates to obtain reinsurance coverage. Industry participants predict that failure to accomplish this will result in losses in the upcoming year.
Reinsurance enables insurers to shift a portion of their financial risk to other businesses known as reinsurers.
Insurers purchase reinsurance to reduce liability, stabilize losses, guard against disasters, and boost capacity.
Tope Smart, global managing director/CEO of NEM Insurance Plc, said that with renewals underway, insurers face major issues caused by inflation and foreign exchange volatility.
He claimed that these elements are having a direct effect on prices and making the market more challenging.
“With the ongoing pressure, we anticipate a tougher market environment, or what we call a ‘hard market’ as we enter the New Year.”
“The market remains hard, with pricing being impacted by ongoing inflation and fluctuations in foreign exchange rates. These elements have resulted in a more challenging climate than we have experienced in previous years. The rising claims profile is also contributing to this, resulting in tougher sanctions for businesses,” Smart explained.
He added that the market is proving to be more challenging than expected, reflecting the broader pressures of inflation and financial instability in light of recent trends and experiences.
Despite the difficulty of the situation, he stated that it is nonetheless essential that participants successfully traverse this terrain in order to guarantee success for all parties—insurers and reinsurers alike.
Speaking about this, Ken Aghoghovbia, deputy managing director/chief operating officer of Africa Re, stated that domestic insurance businesses in Nigeria are facing increasing difficulties, particularly concerning inflation and foreign exchange fluctuations.
He stated that many insurers operate predominantly in Naira, which means they conduct most of their operations in local currency and settle claims.
However, when businesses purchase their reinsurance coverage from foreign markets, the effect of foreign exchange is present.
“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 exacerbate the connection between local insurers and their overseas counterparts, disrupting business operations,” he stated.
Reinsurers frequently want greater coverage capacity in response to inflationary pressures, which raises the cost of reinsurance, explains Aghoghovbia. This premium hike is passed on to local insurance providers and, ultimately, to customers.
“As insurers navigate these challenges, the need for adjustments in sums insured and premium rates becomes evident.
“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,” Africa Re’s chief operating officer stated.
He said that reinsurers are urging local insurers to revalue insured assets to reflect their current market values. But, he added, “both insurance and reinsurance companies have managed claims very well, so there are some underlying disciplines on pricing specific to Nigeria.”
Globally, insured yearly losses from natural disasters frequently surpass $100 billion. They have already surpassed the 10-year average of $37 billion by reaching $62 billion in the first half of 2024.
