Analysts at Moody’s Investors Service have warned that a prolonged period of high inflation would weigh on EMEA insurers’ profit and could bring adverse second order effects.
In particular, the rating agency expects property and casualty (P&C) insurers to face higher claims costs because of inflation, although these could be offset with premium rate rises to some extent.
At the same time, measured interest rate increases should enhance P&C insurers’ investment income, which has been held back by ultralow rates over the last decade.
And Moody’s added that, from an economic capital perspective, rising rates are positive for all insurers – especially life insurers whose solvency requirements are sensitive to rate changes.
However, sustained higher inflation could also put a greater strain on both P&C and life insurers, analysts maintained, with potentially severe erosion of the EMEA P&C sector’s combined ratio.
Prolonged high inflation could also slow economic growth or even trigger a recession, dampening demand for many forms of insurance, and increase the risk of an abrupt rise in interest rates.
In contrast to a more gradual increase, this would be negative for insurers, weighing on their equity and leverage metrics.
A combination of slow growth, high inflation, and rapidly rising rates might also cause high financial market volatility, hurting insurers’ investment returns and solvency ratios.
“For insurers, the impact of inflation depends on its strength and duration, and on the size and speed of any interest rate increases designed to offset it,” said Helena Kingsley-Tomkins, a VP-Senior Analyst at Moody’s and the author of the report.
“Persistently high inflation could hold back economic growth, hurting insurance demand; and if accompanied by rapid rate rises and market volatility, insurers’ reported equity, earnings, and economic capital would fall.”
