Inflation set to cause delayed price rises as insurers battle reserve adequacy: Marsh

Marsh McLennan has warned there is significant risk that the inflation crisis will leave parts of the insurance industry inadequately reserved and cause a delayed rise in prices as the market reacts more slowly than many other parts of the economy to the financial turmoil. The company’s experts also told media that companies are operating in a much riskier world today than we thought just three years ago, putting risk management top of the agenda and at an absolute premium. Jay Dhru, global head of business intelligence at Marsh McLennan’s reinsurance broker Guy Carpenter, said the (re)insurance industry is in a relatively strong position to cope with higher inflation. He pointed out that it is one of the highest-rated sectors by ratings agencies and has been delivering profitable underwriting. Rate increases in the primary and reinsurance markets have contributed to improved profitability for both sectors. Meanwhile, higher investment yields in a rising interest rate environment are also providing a tailwind. Dhru explained that the risk transfer industry’s profitability has been buoyed by a long period of reserve releases. But he warned things are likely to change as inflation increases claims and previous pricing and reserves begin to look deficient. In fact, Dhru believes there is “significant risk” that inflation will have a delayed and amplified impact on loss reserves, which could significantly impact (re)insurers’ profitability for several years. “That is the thing to look out for,” he said. “Increased claims frequency and/or severity driven by inflationary pressures could have an adverse impact on reserve adequacy, providing a tailwind to pricing that has to come otherwise that becomes a headwind,” said Dhru. He explained that much of the current reserve redundancy is driven by short-tail lines such as workers comp but said some others areas, such as liability, are already showing signs of reserve deficiency. “The view is that companies will go from redundancy to adequacy. But what we see typically is they skip adequacy and go straight to deficiency,” he said. “We look at inflation really as a symptom for the insurance industry. While it provides headwinds, the real impact we think comes in the form of loss costs and insurers’ ability to price for that,” he said. “In conclusion, yes, inflation is a headwind for the insurance industry and a real issue on top of other risks like climate change that amplify the risk landscape today. Specifically, losses associated with nat cats have been increasing significantly over the last decade. So, insurance companies are attempting to price and underwrite for inflation and those other risks today. They are doing that from a position where they are generally well capitalised but there will likely be shuffling of market positions and performance based on how well companies anticipate and manage the risks ahead,” he added. Jack Sallada, managing director of global placement at Marsh, said carriers are trying to work out how to price adequately to ensure they have enough reserves to handle claims. Whether this ends up in higher rates for some risks remains to be seen but it will certainly mean more insurance is needed to cover higher claims values, he said. As a result, insurance buyers are going to have to buy more insurance at coming renewals to cover a range of risks impacted by inflation, with lines from property through to casualty, motor and workers compensation all affected, Sallada warned. His Marsh McLennan colleague Til Schuermann, partner and co-head of the Americas finance, risk and public policy practice at Oliver Wyman, said the big jump in inflation has added to a list of crises that have bought risk management to the fore. “We are really living in a much riskier world than we thought we were living in about three years ago. There are parallels now to the financial crisis of 2008, as much as that crisis revealed that the mortgage markets and banks were a lot riskier than we thought in 2006, say. So, now we are learning that the world is a riskier place geopolitically. It’s a place where global pandemics do happen and yes, climate change is here now,” he said. “A just-in-case economy is a lot more expensive to run than a just-in-time economy because a just-in-time economy assumes everything is going to go well, while a just-in-case economy prepares for Murphy’s Law. Having a large military is not free for any country. Building up public health capacity is not free. Dealing with and preparing for climate change is not free. So, these risks are not diversifiable and we are stuck with them and need to manage them, at considerable expense. We are facing a world that is a lot more risky and more uncertain, and risk consciousness and risk management really are at a premium,” he added.

Inflation set to cause delayed price rises as insurers battle reserve adequacy: Marsh

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