Inflation will prolong hard P&C market: Moody’s

Credit ratings agency Moody’s said that a period of prolonged inflation driven by the war in Ukraine will force P&C insurers to continue to raise prices to help meet the higher cost of claims.

Risk and insurance managers could have expected an overall market softening if Russia hadn’t invaded Ukraine, as the world emerged from the Covid-19 crisis and conditions normalised.

But Moody’s pointed out that a combination of post-pandemic supply chain bottlenecks, not helped by China’s continued hard-line approach to lockdowns, and soaring energy prices as a result of the Ukraine conflict, have fuelled inflationary pressure globally.

“In our central scenario, which we regard as broadly credit-neutral for EMEA insurers, inflation will push up property and casualty (P&C) claims, but the industry will be able to largely offset the increase by raising prices and will benefit from better investment yields as interest rates rise,” said Moody’s.

“We view a downside scenario of prolonged high inflation as the key risk facing insurers. This would cause larger claims increases, requiring price rises that the sector may be unable to push through, eroding its earnings. Persistently high inflation could also hold back economic growth, hurting insurance demand. If accompanied by aggressive rate rises and market volatility, insurers’ reported equity, earnings and economic capital would fall,” added the credit ratings agency.

Prolonged high inflation would hurt P&C earnings, continued Moody’s. It said sustained high inflation would lead to bigger increases in P&C claims, already trending upwards because of more frequent extreme weather. Retail P&C players, subject to intense competition, may then be unable to push through offsetting price rises, it said.

Moody’s believes that commercial P&C insurers have more scope to raise prices on new business. But they may also come under greater pressure to increase reserves against unresolved prior year claims as inflation feeds through to litigation and medical expenses, it added.

“While commercial P&C insurers should continue to benefit from rising premiums, the pace of commercial P&C price growth is slowing. As a result, prolonged high claims inflation is likely to erode their underwriting profit over time,” said Moody’s.

“In a scenario of sustained high inflation, commercial P&C insurers are also at risk of being forced to put aside additional reserves against past claims. In some lines of business, such as medical malpractice insurance, it can take many years after a claim is incurred for insurers to settle, or even be notified of a loss. These insurers must therefore estimate their potential future liabilities, and as a result typically carry large reserves on their balance sheets,” continued the ratings agency.

Moody’s said the reserves held by EMEA P&C insurers are in pretty good shape, providing an adequate buffer against the impact of inflation on claims.

But if high inflation has a negative effect on earnings and, potentially, on equity in an extreme scenario, Europe’s risk and insurance managers must brace for a longer hard market than anticipated.

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