Claims inflation will cause a short term impact in the re/insurance sector, but will drive higher prices, causing a positive impact in 2023 and 2024, according to Goldman Sachs analysts.
While there has been much positive commentary on pricing, claims inflation remains a focus, analysts have pointed out, mainly regarding whether pricing fairly reflects both higher claims inflation and a material increase in catastrophe losses from weather events due to climate change.
Analyst uses a number of reinsurers as an example. Swiss Re, added $0.7bn of inflation IBNR reserves for higher losses in property, specialty and motor lines. SCOR has also increased its reserving by €485mn to reflect higher inflation in P&C after its inflation assumption review.
Unlike Swiss Re and SCOR, analysts noted, Hannover Re and Munich Re did not increase reserves for inflation in Q3. They also indicated that they would not see any reserve charge for 2022 from inflation, due to a more conservative reserving position.
According to Goldman Sachs, London Market names were relatively relaxed as claims inflation development was as expected and pricing remained ahead of it.
Analysts said: “In our view, inflation reserving increases is backward looking and a 2022 not 2023 issue, as long as pricing increases will cover higher inflation. It is indeed a short-term negative for the sector (driving increasing loss picks and reserve charges – both of which happen immediately), but a medium-term tailwind as it is passed through to pricing (which occurs as the book reprices over the following 12 months and earns through the P&L over the subsequent 12 months).
“We believe 2023 and 2024 will see the positive impacts of inflation coming through, both in higher top-line growth and improving margins. Indeed, the impact of higher inflation on property prices is one of the key reasons the property insurance market has hardened, increasing demand, with the supply of capital flat to down. This demand / supply imbalance is driving higher pricing.”
Goldman Sachs also highlighted that there needs to be more focus on long-tail lines – which is driven by persistently high levels of inflation, which will only become apparent over time.
These long-tail lines – particularly US Casualty -, analysts noted, have already been suffering from higher inflation (social inflation) for a number of years, and there is not a direct link between social inflation (cost of court awards) and underlying inflation (i.e. not commodity or food prices), but it might come through on wage inflation.
“Generally speaking, higher interest rates are positive for insurers’ solvency ratios and investment income, leading to higher reinvestment yields. P&C insurers have policies with duration that typically last for 12 months, which suggests inflation risks can be repriced every 12 months,” analysts added, highlighting that inflation and interest rates are expected to remain high in 2023.
They noted that, according to Goldman Sachs’ forecasts inflation and interest rates are expected to remain high across major economies.
They concluded: “We believe higher inflation should prolong the hard market cycle, while stabilised higher interest rate should support investment income as matured fixed income assets are re-invested.”
