Claims inflation is expected to remain a highly noticeable feature for the rest of 2023, according to Bloomberg Intelligence’s new Europe P&C Insurance 2023 Outlook, with analysts believing that insurers will not be able to increase rates enough to fully offset rising expenses.
According to analysts this situation has been building since the steady premium-volume recovery in 2021, when economies emerged from lockdowns due to the COVID-19 pandemic.
BI’s outlook follows on shortly after a recent thematic review conducted by UK regulator the Prudential Regulation Authority (PRA), part of the Bank of England, highlighted how concerns have been growing across the general insurance sector regarding the impact of claims inflation on general insurance claims.
BI noted that besides cyber insurance, there are several key areas where companies can boost volume. The rollout of IFRS 17 accounting that starts in earnest with Q2 results has the potential to sharpen investor focus on book value and the return on it. The uncertainty caused by the new accounting rules isn’t likely to help sentiment this year.
Kevin Ryan, BI Senior Industry Analyst – Insurance, said: “The shares of insurers in our European P&C peer group have posted positive returns of 1.52% in euro terms in the year to Jun. 7, with the recovery since H2 2020 slowing. The arrival of inflation and war in Ukraine has continued to affect sentiment this year. Despite this, the rebound of some companies’ stocks reflects relief that the severity of losses from the conflict hasn’t been as bad as first feared.
“Sampo’s bid for the remainder of Hastings closed in December 2021, while the takeover of RSA was completed in June 2021. Yet this hasn’t led to further consolidation, which we continue to find surprising.”
According to BI’s Outlook, claims inflation will likely be a key theme through 2024, however the firm believes insurance pricing fails to “adequately reflect this.”
Even though 17 European P&C insurers’ net earned premiums increased 7.5% on average in 2022, the European building-materials index rose 16% in H123. Inflation may drive claims significantly higher and squeeze profit next year, stated BI.
Analysts highlighted how the consumer price index for auto parts has jumped in the past three years, and this is a trend that looks set to continue, with input costs seemingly on an upward trajectory.
Elsewhere, BI addressed how the adoption of IFRS 17 changes the basis on which European insurers report on the performance of their nonlife business. Though some things look familiar, the discounting of all claims reserves complicates analysis and will make future results “more sensitive” to movements in interest rates, states BI.
Ryan, added: “European insurers’ restatement of 2022 results illustrates the complexity of new reporting standards, particularly for nonlife insurance. Allianz and Zurich reported higher P&C profit on the new accounting basis, yet Axa and Generali saw profit decline. Some of that reflected one-time adjustments to IFRS 17’s ‘best estimate’ reserving which negated previously reported gains from excess reserve releases. Prior-year reserve releases were generally lower and underlying accident year-loss ratios higher.”
