The global economy saw some of the highest inflation rates in decades last year as the Ukraine war and supply chain disruption drove commodity prices sharply higher. But with significant interest rate hikes imposed by central banks worldwide, disinflation, which means prices are still increasing but at a slower rate (not to be confused with deflation, or falling prices), has become the keyword for 2023. Although monetary policy normalisation is, in principle, good news for re/insurers' investment income in the medium- to long-term, higher market volatility is likely.
For the re/insurance industry, different lines of business could be subject to varying degrees of inflationary impact. Short-tail business like property is sensitive to construction cost inflation, whilst the motor business could be subject to repair cost inflation. Increasing medical and wage inflation poses other challenges to long-tail casualty claims.
With heightened market volatility, re/insurers must take a forward-looking view on inflation and take it into consideration early in pricing, setting reserves, and structuring reinsurance programmes.
