A new note from Swiss Re says that rising claims inflation, compounded by the demand-supply mismatch of reinsurance capacity in a rising interest rate environment, could contribute to an increase in the cost of providing insurance capacity in 2023 and beyond.
The firm made the prediction in its two-page Economic Insights published this week.
In a nutshell summary of the world’s economy, Swiss Re wrote: “This year’s US dollar strength, along with high inflation and rising interest rates, have exposed pockets of financial vulnerability.
“Yet markets now expect imminent peaks in inflation and pauses in interest rate increases, driving a US dollar reversal. It is too soon to discount both market risks and lagged effects on claims inflation, which will likely keep upward pressure on re/insurance rates.”
The strength in US currency, said the financial giant, was due to policy tightening by the Biden administration in order to fight inflation.
It said that interest rates in the US had risen at their fastest pace in decades and that it did not expect the Federal Reserve to cut rates despite the risks of recession next year.
In a world where the dollar, it said, plays a dominant role in global trade and financial strength, US policy creates spillover effects.
It wrote: “In addition, this episode of USD strength co-existed with elevated commodity prices, presenting a double hit of imported inflation. Finally, for many countries, local currency depreciation will at first have a net negative trade impact, as imports immediately become more expensive.”
It concluded: “Sticky prices do eventually become unstuck, but adjustment lags matter more when inflation is high, as the gap between current and old prices is higher with time. In insurance, prices are unlikely to have fully adjusted as many of the drivers of claims inflation in non-life (such as producer or pipeline prices for construction, healthcare and motor) still exceed headline CPI inflation (eg, due to raw material shortages and USD appreciation).
“Compounded by the demand-supply mismatch of reinsurance capacity in a rising interest rate environment,6 rising claims inflation could still contribute to an increase in the cost of providing re/insurance capacity globally in 2023 and beyond.”
