In a 2023 Asia keynote webinar series, Swiss Re delved into the trends, impacts, and implications of inflation on the re/insurance industry.
The discussion came at a time when the global economy has faced some of the highest inflation rates in recent history, spurred by the Ukraine conflict and supply chain disruptions that pushed commodity prices higher. Globally, central banks responded with significant interest rate hikes. The focus was on “disinflation,” a scenario where prices continue to rise, albeit at a slower pace, unlike “deflation,” where prices decline.
John Zhu, Swiss Re’s chief economist in the APAC region, pointed to two key observations to note about inflation.
“First, we think the way back down towards the central bank’s inflation targets is going to be slower and bumpier than inflation on the way up,” Zhu said.
“The second point is that countries will be in their own different cycles. Looking ahead, economists often look at pipeline cost pressures for firms, which is often measured by the producer price indices.”
While the shift towards monetary policy normalization could potentially enhance investment income for re/insurers in the medium to long term, it is also expected to bring about increased market volatility. This scenario presents a mixed bag for the re/insurance sector, affecting various lines of business differently.
“In all my years of being an economist, I’ve not had to go into such granular level when we talk about inflation and our forecasts. CPI is no longer enough. We look now deeper at industry sector level and also trying to find new relationships in terms of how we forecast construction costs, supply and demand dynamics in individual countries, [and] wage pressures,” Zhu said.
Particularly sensitive are the short-tail business sectors such as property, which are impacted by rises in construction costs. Similarly, the motor business faces challenges from increasing repair costs. On another front, long-tail casualty claims are becoming more complex due to rising medical and wage costs.
Given these conditions, re/insurers are advised to adopt a proactive approach by incorporating inflation considerations into their pricing strategies, reserve settings, and the structuring of reinsurance programs early on to mitigate potential impacts. This strategic foresight is crucial as the industry navigates through the uncertainties brought by a fluctuating economic environment.
Swiss Re claims expert Dawn Tan said inflation may result in higher claims costs for insurers and could also expose policyholders to the risk of under-insurance.
“How do we address this? Insurers can work closely with their insurers to conduct regular reviews and property valuations to update the current insured values, thereby reducing the risk of under-insurance. Results also need to be assessed to ensure that they are realistic and have reflected the impact of inflation,” Tan said.
As the re/insurance industry grapples with the ramifications of sustained inflation, Swiss Re’s webinar underscored the importance of incorporating inflation considerations into their operational strategies to better navigate the challenges of a fluctuating economic landscape.
