Non-life insurers are negatively impacted by higher inflation due to impacts on claims costs. Actuarial models which assume the past is a good predicter of the future need adjusting. This requires assumptions about the duration and severity of excess inflation, and its effects on lines of business.
As inflationary pressure intensifies, the challenge of how insurers need to deal with it also grows. Over the past year, prices have risen sharply as a result of post-pandemic supply chain disruptions and rocketing energy prices due to the war in Ukraine. Claims costs are directly linked to inflation and hence heavily impacted.
Inflation rates by country
Impacts on non-life insurance
The majority of traditional actuarial models assume the past is a good place to start when predicting the future. They therefore don’t capture the significant change in inflation that we are now experiencing, and need to be adjusted. It is not an easy task – any model that will allow for excess inflation must be sufficiently granular to capture the different effects of inflation on individual geographies and lines of business.
Lines of business potentially affected by type of inflation
Is wage inflation on the cards?
So far the inflation spike we have seen has mostly been on prices. This directly impacts mainly short-tailed lines of business such as property and engineering. Early indications suggest, however, that price inflation is now also driving wage inflation in some countries, which then also affects the cost of claims for long-tailed lines of business such as liability.
Is excess inflation here to stay?
We know that excess inflation is with us, but for how long? At KPMG’s recent Actuarial Smart Soiree event of more than 100 insurance industry representatives in late November, more than half of attendees believe excess inflation will last well into 2024. This is important, as the compounding nature of inflation means that its duration materially affects the impact on insurers’ reserves.