With inflation currently standing at 3.4%* against the Bank of England’s target of 2%, insurance organisations continue to see increases in the cost of claims settlements. Motor insurance claims costs, in particular, have risen by 34%, according to a report by the Financial Conduct Authority, against a backdrop of inflation rising by 21%. These higher claims costs, combined with rising capital pressures, are proving challenging for insurers and prompting many to reassess their reinsurance strategies to determine whether they still provide the value and protection insurers expect.
Inflation can fundamentally change an insurer’s risk profile. Higher repair costs, rising wage inflation and increasing supply chain pressures can contribute to larger, more volatile and more uncertain claims and have a direct knock-on effect on all aspects of reinsurance. We look at how insurers can adapt to a changing risk profile.
How the economics of reinsurance are changing
Reinsurance firms are uniquely exposed to inflationary pressures, which are reflected in their pricing and terms. Recently, they’ve also faced higher costs, tighter conditions and stricter flexibility, particularly among loss-affected programmes which have been hit by substantial rate increases. Many have responded by tightening their terms and reassessing their risk appetite.
Reduced capacity in casualty and long-tail lines has led to higher premiums and lower coverage. This has resulted in higher retentions, reduced limits, and narrower wordings, meaning that reinsurance is not only more expensive but also offers less protection and offloads more risk onto the buyer than before.
For insurers, this naturally creates challenges. Reinsurance remains a vital tool for capital protection and earnings stability, but its increasing cost can affect an insurance company’s profitability. At the same time, renewing equivalent programmes is becoming economically challenging and potentially unachievable.
Many organisations, therefore, are turning to an annual strategic re-evaluation to assess how a reinsurance policy supports their broader risk framework and capital policy.
Rethinking retention levels
One of the most important issues for CFOs and Actuaries to consider is whether to retain existing risk levels. Because of inflation and the resulting cost increases, claims are becoming more expensive and losses more frequent, shifting into lower layers and contributing to higher premiums.
Higher retentions, especially when combined with alternative risk financing or increased capital buffers, may offer insurers better value in the long run. Although this may incur higher costs, it may justify the increased protection it offers.
The solution is to ensure retention decisions are made by incorporating forward-looking, data-rich inflation assumptions and realistic stress scenarios, rather than focusing on the past. To balance risk appetite, capital efficiency, and earnings stability, retaining some increased risk may be beneficial if supported by robust pricing strategies and strong capital. In some cases, to protect the bottom line, insurers could consider maintaining or even lowering coverage.
New treaty structures
Inflation also challenges the suitability of traditional treaty structures. While they offer simplicity and capital relief, quota share arrangements can become expensive if underlying loss ratios deteriorate. When claims costs escalate, quote shares, excess-of-loss programmes, and aggregate covers can respond differently.
Insurers are also increasingly interested in flexible or bespoke solutions for programme design. These can include aggregate covers tailored to inflation risk, multi-year structures, and reinsurance policies closely aligned with stringent regulatory requirements. While more complex, these structures offer greater resilience and respond to today’s inflationary environment rather than to past conditions.
A more collaborative approach
This new inflation-sensitive insurance environment emphasises the importance of finance, actuarial, and reinsurance teams working closely together to make informed decisions on pricing, reserving, capital modelling, and reinsurance purchasing in response to higher inflation, and to understand how inflation can impact risk.
To achieve this, insurance companies must use high-quality data, ensure complete transparency, and establish clear lines of communication with their reinsurance partners, who, in turn, seek cedants that can demonstrate these qualities so that capacity can be increased and outcomes improved.
Looking ahead
Inflation may rise or fall in the future, but insurers’ response is important. They can no longer treat reinsurance as a neglected safety net; rather, it must be actively reimagined to reflect the real risk profiles, strategic priorities, and economic realities that insurers face today.
Insurers that question assumptions, stress-test structures, and adapt with foresight can utilise reinsurance as a powerful tool to manage inflation, even in an uncertain economic environment.
If you’d like more information about how Brighter can support your insurance function, particularly in an inflationary environment, contact us.
* as of 21 January 2026
