The Bank of England has published a letter sharing insights from its recent thematic review across the general insurance sector focusing on the effect of claims inflation on general insurance claims.
The review found that the impact of a persistent spike in claims inflation may result in a material deterioration of solvency coverage for some firms unless mitigating actions are taken.
The Bank of England expects high claims inflation to affect every general insurance firm. It has also observed examples of good practice across a selection of insurance firms, from across the London market, as well as retail and commercial insurers.
The letter stated: “Our review has identified a number of observations relating to how claims inflation differs by line of business and geography. In particular, there is uncertainty in the severity and duration of claims inflation expected, and there may also be a lag before it materialises. This has given rise to additional uncertainty around future claim settlement costs which will need to be considered in business planning, reserving, and risk management.
“Technical provisions must be calculated based upon up-to-date, credible information and realistic assumptions. Therefore, claims inflation should be robustly considered. Also, we expect firms to ensure the risk of further claims inflation is appropriately allowed for in the internal model Solvency Capital Requirement (SCR) calculations and where the Standard Formula is used to calculate the firm’s SCR, that it remains appropriate.”
The Bank of England hopes its review to be useful as firms prepare for their year-end reserving exercise, capital and business planning for 2023.
It would also like to encourage Chief Actuaries to assess the extent to which the key findings and observations for good practice raised in the letter are relevant to your business, how they are being addressed and to share the letter with the Board and other key stakeholders.
These findings and observations have been grouped into five key areas of good practice, these include: to consider how inflation is manifesting in firm’s claims, and how this may change over time; to assess the appropriateness of existing reserving techniques in the current inflationary environment; and to maintain feedback loops between claims, reserving, capital modelling and underwriting/pricing functions.
As well as to consider whether the uncertainty around claims inflation has been adequately allowed for in the capital requirement; and to ensure that risk management systems continue to be effective.
