A new note from WTW suggests that insurers should look at their reserving, investment, and pricing strategies, alongside their approach to portfolio management, in order to best place themselves in the current high-inflation environment.
The article, ‘What does inflation mean for the insurance market?’, published on the WTW site, says that insurers should consider these ‘key issues’ to manage their exposures.
Around reserving, the firm says that insurers should consider buying more reinsurance if they find their existing arrangements may not meet future inflation-impacted exposures, including long-tail liability claims. It also advised that inflationary pressures could bring investment opportunities as Central Banks raise interest rates to combat high inflation. It also said that increased returns on investment can be seen as a mitigating strategy to help balance some of the inflation risk experienced in the underwriting side of a portfolio.
Elsewhere, it said that insurers will need to consider whether their pricing has kept in line with the growth in exposures caused by claims inflation due to inflation. When it comes to portfolio management, WTW said that insurers need to understand the correlations between business lines to take a pro-active approach to quantifying, and managing, inflation risk.
The WTW article refers to the ‘Dear Chief Actuary’ letters published by the Prudential Regulation Authority more than two years ago that expressed concerns over whether insurers were giving sufficient thought to how their businesses would be affected by inflation.
WTW wrote: “The PRA was concerned an under-appreciation of claims inflation experience not only impacts the understanding of historical experience – the view on reserving adequacy – but also how to adjust historical experience to reflect today’s terms – the view on pricing adequacy.”
It added: “Fast forward to 2022 and the PRA’s concerns take on a more urgent meaning. Russia’s invasion of Ukraine, along with further Covid-related lockdowns in China, have added to supply chain issues and increased inflationary pressures.”
Recently, high inflation has been a running subject across the world. The most-recent figures for Germany show that the country now has inflation of 10.4%. Across the border in France, the current inflation rate is 6.2%, but is predicted to rise at the beginning of next year.
This new article from WTW comes after recent work by Goldman Sachs indicating that pricing is currently above claims inflation, which should lead to profitability recovery of the insurance industry in 2023.