Inflation will be a risk factor for insurers in the coming years.
Although inflation could push up claims, Swiss Re thinks the overall outlook for the insurance industry remains positive. Strong economic growth, hard insurance premium rates, rising risk awareness, and accelerating use of digital technology augur that the insurance industry should weather this inflationary phase well, write Swiss Re economists Fernando Casanova Aizpún and Xin Dai, led by chief economist Jérôme Haegeli.
They note that the insurance industry has been resilient to the disruption caused by the COVID-19 pandemic, with premium growth outpacing global GDP growth. However, not all insurance segments fared as well. Those linked to economic activity, such as certain segments of commercial lines, credit insurance and cross-border trade insurance, faced more challenges, the Swiss Re economists point out.
The mobility restrictions imposed by the pandemic slowed growth in auto insurance premiums. At the same time, claims decreased: Fewer drivers on the road resulted in fewer accidents. In addition, mortality and medical-related insurance products outperformed during the pandemic, Swiss Re's economic note reads.
Monetary policies impactful
The report goes on to predict that accommodative monetary policies will shore up the economic recovery, but also fuel high levels of inflation. For insurers, this could “offset some of the earnings impact of strong demand and hard rates. Higher levels of inflation have implication for both sides of insurers' balance sheets,” Swiss Re says.
What are these implications on insurers’ assets? “Gradual normalization of monetary and fiscal policy will push bond yields higher; equity performance, however, could falter should there be an abrupt increase in interest rates,” the analysts explain.
What about insurers’ liabilities? “Non-life insurers are most vulnerable to inflation risk. Exposures vary according to the origins of claims inflation,” the analysts note.
They add that claims inflation in long-term liabilities will also have a direct impact on insurers’ technical provisions, particularly in meeting regulators’ capital maintenance requirements. “If inflation risks persist and lead to higher claims in excess of assumptions used in their financial modelling, insurers may need to increase reserves, which would also impact profitability,” Swiss Re cautions.
