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May 2022

The scourge of inflation

Source: Middle East Insurance Review | Jan 2022

There comes a point where inflation ceases to be the sole concern of economists and central bankers and starts to affect every business everywhere.
 
There seems little doubt that inflation will become increasingly important to insurers and reinsurers as we enter the New Year – across most markets in the MENA region – and Turkey in particular.
 
Turkey is the subject of our market focus this month - and all the signs are pointing to a period when inflation in that country could continue to be particularly troublesome for insurers trying to grow the base of their businesses. Economic growth for the nation is forecast at around 5% for the year and, under normal circumstances, this should prove to be a boon for the insurance sector as all lines increase.
 
Turkey’s president has forecast that the country’s GDP will top $850bn in 2022, rising to $975bn in 2023 and $1tn in 2024 - according to the Official Gazette published in September 2021.
 
But inflation in Turkey in 2021 is estimated to have run at around 20% - indeed it has been in double digits for most of the last four years – so high inflation is not a novelty. The present weakness of the Turkish lira and turnover at the head of the central bank and the finance ministry could exacerbate this. The official target for inflation in Turkey in 2022 is 9.8%.
 
Analysts suggest that this shows the government’s prioritisation of growth over inflation. With the global trend of inflation edging up, it could prove to be difficult to keep inflation in Turkey as low as the government hopes.
 
How could this affect insurance policies? The first point to consider is that high inflation can undermine portfolio quality as well as policy performance. Insurance rates and reserves may be insufficient to cover inflated claims.
 
The second point to consider is that insurance policies should cover perils that are predictable, costed and do not lead to systemic accumulation. Inflation can throw a real spanner in the works here – especially if it is runaway inflation.
 
Inflation is a challenging risk for the industry globally. Adding in currency risk, as with the Turkish lira, leaves an insurance sector that will have to be on its toes for the rest of the year. The Turkish lira has lost around 40% of its value since the start of September, while the central bank cut the benchmark interest rate for the third month running in November.
 
On a regional level, asset managers within insurance companies in MENA will doubtless have substantial exposure to long-term fixed income instruments like US Treasurys.
 
In a high-inflation environment, such exposures could prove to be a handicap, but that is the nature of being a cautious asset manager during an inflexion point – when interest rates grow from zero to single digits in a short space of time.
 
It’s great for insurance companies to be nimble and agile and have all the trendy attributes that their PR companies will trumpet – but sometimes, prior experience of living through high inflation times counts for more than anything.
 
Paul McNamara
Editorial director
Middle East Insurance Review
 
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