Multiple impacts

Insurers need to keep wary eye on inflation

According to Swiss Re's analyses of potential emerging risks set out in its 2017 SONAR publication, the potential return of Inflation is something insurers should not take lightly. It could, the publication says, affect them by influencing investment returns, asset valuations and future, longer-term insurance liabilities. The impact is strongest with P&C insurers, as inflation directly increases claims costs of long-tail legacy business. Life insurers, on the other hand, are impacted by potential changes in asset valuations and investment returns. For example, equities generally tend to perform well in an environment of higher inflation, but they could be negatively affected in the near-term by a more sudden increase in prices.

Temptation posed by higher interest rates

Meanwhile, government and corporate credit bonds, particularly those with long-term maturities, will decline in value. An additional effect on life insurers may be where higher inflation results in rising interest rates, which increases the lapse risk of insurance policies. This is because policy holders of some savings contracts may be inclined to surrender their policies in exchange for new contracts offering higher interest rates, particularly if there is a sharp spike in in the same.

From an insurance perspective, much also depends on the speed of inflation development. Spikes are much more difficult to manage than gradual increases in inflation. Elevated levels for longer time periods are a challenge for insurers as well.

Inflation will add to pressure on insurers’ profitability, already under stress from competition and regulatory requirements. While insurers can protect themselves through a number of measures such as diversifying assets into commodities or real estate, circumstances warrant careful management and may not always allow such measures to be taken in the first place.

Supporting financial resilience

Re/insurance supports financial resilience by acting as a shock absorber and promoting growth through its core businesses. This is particularly important in a challenging and volatile macro-economic environment.

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