Global: Dealing with long-term inflation risks
Source: Middle East Insurance Review | Jun 2022
The debate has moved on from whether inflation will spike to how long it will last, said Gallagher in a report issued last month with the title ‘The inflation risks facing the insurance sector’. The report noted that financial markets have begun to price in more pernicious longer-lasting inflation. In most major economies, a combination of accommodative monetary and fiscal policy, COVID-induced supply constraints and, more recently, a surge in energy costs have created an inflation spike. For example, annual CPI inflation in March reached 8.5% in the US and 7.8% in the EU, in both cases the highest readings recorded for over 25 years.
Looking across the major non-life lines of business, the report suggested that there is either evidence of inflation of underlying cost drivers today or an increased risk of inflation taking hold.
The report said that insurers are getting help from the asset side, but slowly and from a low base. The recent rise in investment yields should help earnings. Quite possibly, however, inflation-related impacts on the underwriting result, whether from the current or prior year accident years, could outstrip any benefits from higher investment yields.
There are a number of steps insurers can take to mitigate their exposure to inflation risks including re-evaluating deductibles on the policies they write as well as attachments on their reinsurance programmes; generally, a lower reinsurance attachment will afford greater protection against inflation, but there are a number of additional subtleties to consider. Secondly, putting in place retrospective covers to protect against reserve deterioration. Thirdly, clearly communicating to reinsurers how they are approaching inflation risk in their original portfolios, and lastly, considering structured solutions in order to reduce spend, if faced with higher reinsurance prices. M