Geneva Association outlines pros and cons of high inflation for insurers

Written by Adam Cadle

19/01/2023

The Geneva Association has outlined three forces that could make inflation ‘stick’, as well as the pros and cons of high inflation for insurers.

The Association said decarbonisation and the need for massive capital expenditure on green energy as well as higher carbon prices is one of the forces, as well as deglobalisation and the trend towards supply chain reshoring and increasing protectionism. Finally, it said ageing populations will require more public expenditure on health and elderly care and may cause shortages in labour supply.

“The immediate impact of inflation on non-life insurers’ earnings is negative, primarily through rising future claims costs on current insurance policies, the need to bolster loss reserves and, in case of stagflation, reduced demand,” it said.

“The effect on life insurers’ earnings is more neutral. As opposed to non-life insurance, most life insurance products offer benefits that are nominally fixed. Having said this, inflation tends to erode the value proposition of life insurance with fixed benefit payouts, weighing on new business and leading to higher lapses. Lower equity markets, rising interest rates and widening credit spreads adversely affect insurers’ balance sheets through mark-to-market valuation losses. On the other hand, higher interest rates, i.e. discount rates, have a favourable effect on the net present value of future liabilities.

The Geneva Association said, going forward, demand for insurance could benefit from the shock experience of resurging inflation.

“Such shocks – similar to what we witnessed as a result of COVID-19 – typically affect risk perception and sharpen risk awareness. Demand for non-life insurance could also benefit from portfolio shifts from financial to real assets. Furthermore, increasing prices of real assets such as cars and property translate into higher demand for insurance as asset owners seek to expand policy limits. For life insurance, inflation presents particular challenges as it erodes the value of future fixed payouts, making in-force life insurance products less attractive, adversely impacting sales and increasing lapses and surrenders. However, the effects of inflation on interest rates are widely considered more relevant. Customers might have more appetite for savings-oriented life insurance products that come with higher yields and inflation-protection features.”

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