According to rating agency AM Best, high levels of inflation which has been driven by supply chain disruptions, labour shortages and rising energy prices, are likely to persist over the medium term.
In February, the Consumer Price Index (CPI) in the UK hit an almost 30-year high of 6.2%, far in excess of the Bank of England’s (BoE) 2% target, with the BoE recognising double-digit inflation as a possibility during 2022.
Initial expectations that a spike in inflation would be a short-lived result of re-opening the economy following lockdowns appear to have been optimistic, with the conflict in Ukraine exacerbating underlying macroeconomic factors.
AM Best expects inflation to drive an increase in claims costs, due to the rise in the replacement cost of underlying parts and increased labour costs.
The ability of insurers to weather these increased costs will depend on their ability to achieve commensurate rate rises, which may be suppressed by high levels of competition in the personal motor and household sectors.
During 2022, AM Best expects that households will continue to experience higher prices for general purchases, and see increases in mortgage payments due to both rising interest rates and higher energy bills.
Analysts believe that this could ultimately reduce consumer demand for insurance.
The fallout from the conflict in Ukraine, and the international sanctions imposed on Russia, could also have a negative impact on UK non-life insurers, warns the ratings agency. Noting that this is mainly through indirect economic impacts, as the majority of them only write domestic business and are unlikely to have material exposure to either Russian investments or reinsurance counterparties.
However, negative economic impacts are already emerging. Equity markets are likely to remain volatile, and supply chain disruption and further rising energy prices are driving inflation up further.
Additionally, the cyber insurance market is exposed to elevated risk as a result of the conflict. Although UK non-life insurers typically write low limit policies with war and terrorism exclusions, AM Best says that losses could accumulate and policy wordings may be tested.
On the pandemic, AM Best claims that the impact on the UK’s economy has begun to subside during 2022, mostly as a result of the withdrawal of domestic restrictions to control the spread.
However, there’s a chance the potential for the reintroduction of government-imposed restrictions in response to new variants, and also the indirect impact of outbreaks elsewhere in the world, could continue to weigh down on economic recovery.
On Brexit, AM Best suggests an unlikely significant direct impact on insurers in 2022, although additional import checks and labour shortages since the UK left the single market have exacerbated supply chain issues.
At the same time, tensions are likely to remain between the UK and European Union through the year and beyond, especially in relation to the Northern Ireland border.