Swiss Re expects increase in US claims severity due to inflation surge

A surge in inflation in the US is expected to drive a short-term claims spike in US property insurance, and create longer-running headwinds for casualty insurance, according to the latest Economic Insight from Swiss Re Institute. It says social inflation will continue to play a stronger role in driving up US claims severity in the medium term, while a medium-term rise in medical and wage inflation could push casualty claims higher.

Swiss Re says it has increased its US inflation forecasts for 2021 and 2022 to 3.7% and 2.3%, respectively, based on a current surge in prices due to a combination of supply shortages (disruptions to supply chains) and strengthening demand on the back of stimulus spending, and as the US economy reopens.

As a result, Swiss Re expects claims severity on the property side to increase in the short term due to a surge in US home construction prices (10.2% year on year in May). “Homeowners and commercial property claims severity are set to rise on the back of the current supply-demand imbalance, which is triggering price rises in building materials and also a shortage of labour in the construction sector,” the insight states. “All told, however, we expect that the surge in construction-related prices will be temporary and will fade again in 2022.”

On the casualty side, claims severity may continue trending higher in the medium term due to potential increases in healthcare and wage inflation, says Swiss Re, adding that it expects social inflation to continue unabated post-pandemic, further eroding insurers’ prior-year claims reserve buffers and also pushing claims costs higher.

Swiss Re notes that the US has been in the midst of a new episode of social inflation since around 2015, with liability claims growth trending higher, while CPI inflation has remained low. “This is driven by factors such as the trial bar increasingly using psychology-based strategies, data analytics, digital media advertising and litigation funding. Other factors relate to jurors’ attitudes to issues like social injustice, rising inequality and negative sentiment toward corporations. We expect the trend of social inflation and 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,” the insight explains.

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