Inflation and its disruptive effect on property-casualty insurance standardization

In property-casualty insurance, risk rates and premiums do not even reach current inflation levels.

Swiss Re has analyzed the worldwide catas in which they participate as treaty and facultative reinsurers and estimates that property and casualty claims will increase by 6% to 13% this year 2023 due to high inflation,

This increase in claims costs is higher than what was expected last year, when an increase of no more than 5% to 8% was predicted.

Property and casualty insurance is a "short tail" business, i.e. it is sensitive to socio-political changes that have an immediate impact on prices, such as inflation. Property and casualty lines are impacted by higher costs when inflation rises, as this price increase is transferred to the materials and labor that insurers need to support for the satisfactory resolution of all claims.

 Substantial increases are occurring in construction prices in general, this industrial sector is very sensitive for the insurance sector's price support as it directly affects almost 65% of property damage and loss of profit claims.

Inflation, on the other hand, increases the amount of the insured's claims, i.e., the clients themselves put pressure from the very moment of the occurrence of the loss with requests for indemnities of much higher amounts, between 5% and 7.50% more, compared to the same type of loss a year earlier, as they see these increases reflected in the estimates they receive from the industrialists in their area and which are then validated by the loss adjusters.

This pressure has been seen and is reflected according to Swiss Re in the top five insurance markets in the World as early as the end of 2022 and early 2023.

The conclusion therefore is that property and casualty insurance will be impacted this year by persistent inflation, with claims cost increases of between 6% and 13% and conclusively with a faster rate of increase than that observed in rates and premiums.

Swiss Re, however, believes that as inflation moderates, the amounts claimed and compensated will fall moderately, and we will see this by the end of this year, having reached the peak of inflation earlier this year.

However, there is a constant repricing by insurers as a result of losses due to higher claims costs at the end of 2022 and this may alleviate some of the pressure on the portfolio due to the high inflation from that same year to the end of 2022.

"Even so, insurers according to Swiss Re will have to maintain price discipline, as it forecasts a still high level of inflation this year (no lower than 5%/6%) and a serious impact on many of the insurance lines and specifically on the health and occupational accident lines.

The automobile sector is no stranger to these impacts and is also affected, "Social inflation and increased claims frequency in this line reaffirms according to the reinsurer, that further rate tightening is required to reduce the estimate that, all things being equal, premium income should have increased by 13% to offset the increases in claims costs already seen and observed by the end of 2022.

Looking at some countries, according to the reinsurer, increases in property-casualty premium income are particularly below increases in claims costs in Australia, Germany and the United Kingdom.

Insurance premiums need to keep up with inflation, or catch up where they have fallen behind, because while inflation is believed to be slowing, it is not expected to fall significantly even by the end of 2023.

Sustained risk underwriting discipline will be needed in 2023 to help improve underwriting results." These inflationary effects will also be drivers for maintaining higher reinsurance prices, as reinsurance rates were already reaching similar increases to those seen in primary direct insurance.

A sharp upward correction has already been seen in reinsurance contract renewal rates for 2023, while inflation and claims costs remain high and are also forcing increases in premiums for insurance lines sold in the primary markets,

The conclusion according to Swiss Re is that there will be less chance of a return to the soft market or lower premiums in the wholesale or reinsurance market and therefore we will continue with a market as we have had for the last two years.

For all those professionals who thought that the market hardness was going to be as in previous cycles, i.e., no longer than a couple of years, I recommend that they adapt and think about accommodating their clients to this persistent situation over time and that it is not going to change in the medium term.

The new investors and insurers that are entering the market taking advantage of the yields resulting from the price increases in recent years will bring more capacity and that is a good thing, but it does not change the result, the underwriting rules and restrictions on the acceptance of equity risks will remain in place for a long time to come, 

Indeed, we see how the risk appetite of these new investors is focused on the same lines of business as always, such as D&O, Professional Liability, Cyber, Accident, Life and Automobile (not Property & Casualty), and with persistently demanding underwriting requirements in the rest of the property lines. Professional Civil, Cyber, Accident, Life and Automobile (not Property & Casualty), and with persistently demanding underwriting requirements in the rest of the property lines, there is no choice but to make sustained risk management plans with our clients, within a clear determination to create policies of self-management of their own risks, with sustained and planned investments for 3 and 5 years in prevention and protection, which will alleviate the narrowing of the insurance markets, as well as the growing inflationary spiral of premiums in the property and casualty lines and loss of profits.