What claims inflation means for insurer reserves
With recent talk of claims inflation, insurers should not be panicked into putting away more reserves than necessary.
Earlier this year, the Bank of England warned that claims inflation will affect all general insurance firms, and urged the U.K. insurance sector to ensure they have sufficient reserves.
In a letter to the chief actuaries of general insurance companies, the Bank said: “There is a risk that persistently elevated claims inflation might result in a material deterioration of solvency coverage for some firms unless they take appropriate mitigating actions.”
There’s no doubt that claims inflation due to rising wages, medical and supply costs has hit everyone in the insurance industry and that we are also seeing a rise in the number of claims. Claims inflation is affecting all classes. From a property damage perspective, it’s cheaper if you can source materials and labor locally but if parts have to be shipped or flown in, the cost of a business interruption claim can go up by an unknown amount.
Claims inflation isn’t going away any time soon. We can expect a continued trend of upward values and numbers of claims in most classes if the social and economic climate does not improve. When people are struggling financially, they are more likely to claim for damage to their property rather than pay to get it fixed themselves.
Having said that, there’s a real danger of claims inflation being hyped in the media and scaring finance professionals into pressing for higher and higher reserves.
Mortgage rates are going up, interest rates are higher than they have been, inflation is still up and the financial world gets jumpy. But for insurers to react by putting another 5% on our reserves would be plain wrong.
I was recently at a lawyers’ seminar with IGI’s actuaries in which we were advised that a 500% increase in claims reserve in some classes could be in order. Our firm has a conservative approach to business, but I firmly believe there’s absolutely no need for such a huge hike.
Despite seeing excellent half-year results – the total gross written premium reported by Europe’s 30 largest non-life insurers in 2022 was 11.7% higher than the aggregated figure in 2021 – you’re still seeing actuaries putting 15% of extra reserves on the books. They are listening to the hype when there’s no need to panic about solvency coverage as the lawyers and loss adjustors have a handle on claims inflation.
Most general insurers have put aside reserves that already cover the inflation of current and future claims, but actuaries spooked by talk of soaring claims inflation are advising that if you have $5 million in reserves, for example, another $1 million should be added, even though the sum reserved already includes an element of claims inflation.
As well as making sure they have strong solvency ratios, insurers are combatting claims inflation by settling claims quickly, negotiating fixed price contracts for repairs and labor, and putting in place infrastructure to keep close track of their claims inflation.
While claims inflation continues to be a concern for insurers, the industry has reserved well and is in better shape than the hype would have you believe – after all, we are not seeing claims going over and above what has been reserved. Will claim values go up? I expect they will, but if everyone has reserved at the right level that won’t be a problem.
Tim Deardon is SVP and group head of claims at International General Insurance.