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The worldwide economic upheaval of the past three years has created headaches for insurers and reinsurers by putting pressure on investment income, curbing consumer appetite for certain kinds of coverage [e.g., motor], stimulating claims activity and making it harder for life insurers to gauge long-term financial performance.
And as the world’s largest economies ramp up deficit spending to combat weak housing and job markets, inflation is becoming an increasingly likely future threat to insurer interests.
There are some positives amid the turmoil. Reinsurers report greater interest in their offerings as primary insurers seek greater financial stability. Certain kinds of life and pension products are seen as a hedge against uncertainty, and some lines are gaining as economic conditions reshuffle the value of business activity.
Swiss Re tapped into part of this picture in a new sigma report that examines the impact of inflation on insurance. Noting that inflation can have different impacts on nonlife and life insurers, Swiss Re said nonlife insurers generally face rising claims costs and in some lines, lower demand in an inflationary cycle.
Insurers must adjust premiums to reflect rising values of the property insured, which can sometimes be difficult due to regulatory restraints.
casualty insurance is especially vulnerable to inflation due to the long time-line often involved in settling claims. In addition to claims inflation, there is the danger of underestimating the future impact of inflation on liabilities in casualty and liability lines.
For nonlife insurers, inflation hedges can be adopted, for example by investing in commodities, real estate and inflation-indexed bonds. Purchasing reinsurance, especially in inflation-high emerging markets, is another possible hedging strategy.
It is interesting that Swiss Re mentioned investment in commodities as a hedging strategy against inflation. Insurers can take advantage of rising commodity prices in inflationary times not only as an investment, but as a source of underwriting business.
Recent examples of such opportunity come from brokers Marsh and Willis.
Marsh recently announced the launch of a metals insurance policy that would provide up to $1 billion (720 million euros) in coverage for firms involved in metals trading, storage and transit. Why introduce such a product now? Record-high gold bullion prices at present are likely to leave such businesses under-insured against physical damage or loss, said Marsh.
Inflationary pressures are driving up the value of metals in transit “dramatically” over the past year, even as the volume of metals had remained about the same, said Marsh. Like a home or commercial building whose value rises, the insurance coverage on objects of rising value must keep pace.
Willis said it has streamlined its global mining expertise for its U.S., U.K. and international hubs into one worldwide practice group to more efficiently serve clients in the global mining sector. Willis also nods to the inflation-driven rise in commodity prices as an incentive.
According to Willis, the ability to offer a global risk management partnership to companies involved in mining “will become increasingly important with the continued impact of the global economy on commodity prices and company income.”
Aside from new business in niche markets, reinsurers might do well by offering not only traditional reinsurance as a hedge against inflation, but structured financial instruments including indexed products as well.
No doubt new inflationary fears will give rise to new hedging strategies in the insurance market.
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