In a recent report, analysts at management consulting firm McKinsey have outlined the risks inflation poses to the insurance industry, noting how US P&C insurers can build resilience against it.
The report writes that the insurance industry faced profitability challenges even before the pandemic, and the sudden unexpected spike in inflation has only added to them.
McKinsey estimates show that rising prices contributed to an approximately $30bn increase in loss costs—the amount an insurer must pay to cover claims—in 2021, over and above historical loss trends.
“As US inflation skyrockets, P&C insurance carriers can’t help but squirm. Almost every line of insurance is slammed by rising claims costs and expenses. With no quick relief in sight, insurers will need to modify their pricing strategies and shore up their operational resilience to weather any scenario that unfolds,” says McKinsey.
The report states price increases have been exceptionally high for the goods and services that drive personal insurance claims.
Motor vehicle parts and equipment prices rose 22.8% between June 2021 and June 2022, while the cost of used cars and trucks rose 14 %
Supply chain disruptions and other causes of inflation in the automotive industry led to an estimated $9bn in loss costs for auto physical damage in 2021.
Loss costs for lines with long settlement periods, such as workers’ compensation, went up by an incremental $4bn, and high prices for core commodities drove up loss costs in multiperil insurance lines, both personal and commercial, by an incremental $8bn and $2bn, respectively.
Insurers can handle any scenario if senior executives drive a well-coordinated approach to countering inflation across all value chain functions, says McKinsey.
The report suggests that leaders may want to consider preparing a “resilience playbook” that allows them to deploy tactics as conditions warrant. This means creating visibility into the value at risk, time to deploy, and investment required for each lever being considered.
Individual tactics will differ by function, the report notes, but collectively, the chief product officer, chief claims officer, and CFO can build enterprise-wide resilience.
The report states, “the company’s chief product and underwriting officers should focus on creating maximum insight into product profitability, developing rate indications frequently and with the most granularity possible to enable quick action. Leading carriers should maintain visibility into data indicators that provide early warning.”
McKinsey adds, “Chief claims officers play a critical role in managing the end-to-end claim process, including goals for customer satisfaction and cycle times. In times of inflation, these executives should increase focus on claim types with the greatest exposure to price inflation and those with the longest cycle times.”
“The CFO’s key task is to emphasize discipline in expense management, ensuring visibility into productivity and allocating direct investment where the greatest improvements can be achieved. The unique role the CFO can play is to guide the enterprise on balancing growth and profitability as inflation and mitigation levers take hold across the portfolio.”
The report concludes that regardless of inflation’s future path, insurers that invest in their operational and financial resilience today will certainly grow stronger and be better able to withstand future shocks.