Inflation could impact demand says Moody’s

Persistently high inflation could hold back economic growth, hurting insurance demand, according to a new report on the EMEA insurance market by rating agency Moody’s.

The agency said that, accompanied by rapid rate rise and market volatility, insurers’ reported equity, earnings and economic capital would fall

Moody’s said that, for insurers, the impact of inflation depends on its strength and duration, as well as on the size and speed of any interest rate increases designed to offset it

Because of inflation, Moody’s expects property and casualty (P&C) insurers to face higher claims costs. In this case, they will be able to counter them with premium rate rises, leading to only a mild erosion of underwriting profit

In the downside scenario, sustained inflation would put a greater strain on both P&C and life insurers. P&C players would face more significant increases in claims costs, which they may struggle to absorb through price increases, leading to a more meaningful erosion of the EMEA P&C sector’s combined ratio.

One possible worrying impact of inflation concerns reserving risk, 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.”

“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.”

“Since medical and litigation costs are sensitive to inflation, even incremental increases in inflation can have a significant adverse impact on insurers’ claims reserves. EMEA P&C insurers’ hold prudent reserves, which have developed favorably for over a decade. Most of

them therefore hold sufficient buffers to absorb some inflationary impact. Nevertheless, prolonged high inflation could have a negative effect on earnings, and potentially also on equity in an extreme scenario.”

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