Could inflation cause a surge in claims for P&C insurers?

Reinsurer Swiss Re described the scenario in its July 15 issue of Economic Insights.

As the economy rebounds strongly from last year's recession and supply chain shortages cause inflation to spike, economists Thomas Holzheu and Anja Grujovic expect rising home construction prices to increase the severity of property insurance claims in the near term.

Similarly, societal phenomena such as rising wages and increased sick leave will push liability claims upward, the two Swiss Re analysts predict. This increase in claims will be particularly noticeable in the United States, they add.

Never seen in 40 years  

The economists predict that inflation will remain at about 3 per cent until the end of 2022, a rate that people under age 40 have never seen, they note. Holzheu and Grujovic advise insurers in the US to brace themselves for a few tough months ahead.

However, this intensification of claim severity will be temporary. It should taper off by the end of 2022, the economists forecast, in line with building material prices.

A contrasting picture emerges for liability insurance. The trend toward rising claims will taper off only in the medium term, the two economists say. Growth in wages and health care costs will not ease up as quickly as that of building materials costs, Holzheu and Grujovic predict.

Claims severity increased sharply from 2000 to 2008, when the world economy was booming. The financial crisis checked that growth, the two economists point out.

Regarding social inflation, Swiss re expects higher liability claims to continue over the next couple of years, “not 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.”