Pat Gallagher talks with Bloomberg's Katie Greifeld about the relationship of inflation and insurance premiums, and how climate change is increasing the demand for reinsurance.


Katie Greifeld: Gallagher is an insurance group; you don't take on the underwriting risk. And just to set the scene for us, you're one of the industries that's benefited from inflation over the past couple of years.

Pat Gallagher: I think that's right. But in a good way. When you see CPI up, and our data is continuing to show our midmarket clients have been expanding their businesses. And when businesses expand, it creates more exposure units — that's sales and payrolls and things like that. Businesses buy more insurance. So when the economy is good — it's good to be an insurance broker. We sit between the buyer of insurance and the seller, and we help that relationship by making sure what the client is buying fits their needs and is the most competitive pricing they can get. So we are actually the ones trying to mitigate the cost increase while the same time the business is growing. And make sure they've got the coverage they need.

Katie Greifeld: To bring this to May of 2024, inflation in May was completely flat at least on a on a monthly basis — we certainly haven't seen that for a while. I mean, given that setup, the dynamics of your business, should we enter into an economic downturn or continue to see inflation cool to the extent it has been, what would that mean for your revenues?

Pat Gallagher: Well, the good news is, we benefit when there's inflation and we also benefit when there isn't. Back to this point that when businesses expand, when you've got a CPI that's growing and you've got inflation that's contained, what you've got is, your businesses that you're ensuring — and most of our business is commercial insurance for people who are doing business — and when they can expand their business and k ow that they can borrow money and not have to deal with the inflationary pressures of looking back and saying "I underpriced this thing." Think about a [construction company that's] trying to price out cement and at some point the pricing on cement is growing at 5% and other times at 7%. Interest rates are bouncing around. It gets more difficult for them to make those bids. So really, it's an interesting thing. We benefit from inflation in the sense that prices go up and payrolls go up. But we also benefit from a good solid economy without a lot of inflation because our business partners expand. So we win both ways.

Katie Greifeld: It's a fair point. And I definitely hear what you are saying. I'm curious on the impact of premiums though. I was looking through your latest earnings report that came out in late April and first quarter insurance renewal premiums were about 7%. You compare that to the previous period and they were up 8.5%. So little bit of a decrease there. If we're entering into more normal environment where the economy is still resilient but inflation is more definitely more under control, what sort of rate should we be expecting for premium growth?

Pat Gallagher: It depends on a lot of things. In general what we've seen in the fact premium rates decline. Our market … is a supply-and-demand market. When there's a lot of supply — and one of the reasons auto insurance is down is because rates have come up nicely and it's it brought in more competition — when that happens it does put pressure on our top line. We're selling more product at lower prices — it's a simple dynamic. What we say however is in that environment, we should be able to expand the number of businesses that we're transacting with. So we should be able to mitigate a decrease by selling more insurance to more potential buyers. But I would say that If you take a premium basis in particular, and take it from 8% expansion in terms of rate and take it down to 5 or 6, it's little bit of a little lift we have to climb over, we have to get more clients to cover that.

Katie Greifeld: There's levers to pull there. Maybe when that goes down, you increase in other ways. I want to talk about reinsurance…. It's insurance for insurance, but no matter what you call it, it seems like it's becoming a more hot area. I know you made an acquisition in 2021 in that space. I'm curious what the opportunity set looks like in reinsurance brokerage right now.

Pat Gallagher: You hit right on it. What reinsurance is — and most people never hear about reinsurance. It becomes a bigger topic when things like Florida property is uninsurable, or when fires on the west are very difficult to place. Then people start asking what's happening, and reinsurance pops up. But it is insurance for insurance companies. Insurance companies accumulate a great amount of exposer, and they do that across a full perspective of risk that faces their clients. So then they have to look at those accumulations and say "Wait a minute, I can't take all this myself." So if the wind really blows this season in Florida, and you've accumulated all that risk with no support behind it, it could be devastating to your balance sheet. So what they're really doing is balancing that balance-sheet risk against what they took on the front end. And it becomes a big issue in places like Florida when those companies have a lost a tremendous amount of money from bad storms and are no longer there to support the primary carriers, saying "I will take that risk." Because it has a direct impact on what those big-name primary carriers can actually accumulate. It's not a very difficult concept to understand. Because when you accumulate a lot of risk as an insurance company, it makes sense to insure some of that off the back and most people would understand. When it disappears, it's a problem.

Katie Greifeld: I'm glad you brought up extreme weather, because it seems that we are seeing more and more extreme weather events and to bring that into the reinsurance conversation. When you think about the increased activity and interest in reinsurance, is it fair to say the climate and what we are seeing there is one the primary drivers of that interest?

Pat Gallagher: Absolutely. I grew up in the Midwest, and we never had tornadoes in the fall. It was a spring event. And we never had the kind of convective storm activity that's surprising people — and it's surprising underwriters. Remember, underwriting is predicated on looking to the past and trying to price for the future. When all of a sudden the rules of the game change, it's really like being on the playing field and somebody says "Oh, by the way, you used to be able to throw forward passes. You can't do that anymore." And now you've got to change the rules all of a sudden.

Clearly, climate change is having a huge impact globally, And if you go all the way back to what insurance is — first of all, remember, insurance is the oxygen of commerce. People go "Oh, it's just bad tax we all have to pay." No no no. You're not going to ship a crate, you're not going to build a house, you're not going to buy a car — even inexpensive ones — without insurance. So it's the oxygen of all trade.

And when all of a sudden the rules change, those rules for how those games get played change. So it's a hugely important part of the economy and the ability for people to grow their businesses. So it makes a lot of sense. And when you all of a sudden see climate change coming in, and floods are happening where they've never happened and people are talking about this is thousand-year flood. Are you kidding? Or this is a set of storms. The professionals are saying this fall should be a very active storm season in the Atlantic, and we know by looking at water temperatures that there could be a lot of energy building up in the Atlantic, which can makes for some very difficult storms. And yet this industry is taking those risks and doing what it does, which is spreading that around the globe. I'm really proud of what this business does, and it never gets that kind of a view. We spread the risk of the few to many, and it works.

Katie Greifeld: I really enjoyed this conversation and hope to speak to you again soon. Our big thanks to Pat Gallagher.