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Inflationary surge to increase claims severity in property lines: Swiss Re

2nd August 2021 - Author: Matt Sheehan

Strong recovery from last year’s recession and supply-chain shortages is driving a surge in inflation, and will cause an increase in claims severity for property lines in the short term, according to Swiss Re.

The latest Economic Insights report from Swiss Re forecasts a temporary 10% gain in home construction prices, as well as a medium-term rise in medical and wage inflation that could push casualty claims higher.

At the same time, the reinsurer expects social inflation to continue to push up liability claims.

On the property side, homeowners and commercial property claims severity is set to rise on the back of the current supply-demand imbalance, which is triggering price rises in building materials and also a shortage of labour in the construction sector.

All told, however, Swiss Re expects that the surge in construction-related prices will be temporary and will fade again in 2022.

RMS

And on the casualty side, social inflation is expected to continue unabated post-pandemic, further eroding insurers’ prior-year claims reserve buffers and also pushing claims costs higher.

Swiss Re noted that the US has been in the midst of a new episode of social inflation since around 2015, with liability claims growth trending higher, while CPI inflation has remained low.

This is driven by factors such as the trial bar increasingly using psychology-based strategies, data analytics, digital media advertising and litigation funding.

Other factors relate to jurors’ attitudes to issues like social injustice, rising inequality and negative sentiment toward corporations.

Overall, analysts believe the trend of social inflation and higher liability claims will continue over the next couple of years, notot least as the COVID-19 crisis is likely to amplify rather than alleviate the societal factors in play, such as economic, educational and health inequality.

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