High inflation rates for insurers

...associated expense provisions may increase. For Life insurers, benefits linked to consumer price inflation increase, and non-life insurers typically observe claims inflation. We see insurers thus making up their minds on how to deal with increasing inflation. In this paper an approach is sketched, both for the steps to take right now, and more importantly, also on how to be prepared for unforeseen developments. 

This is not the first time that high inflation spikes

Risk appetite

Appetite towards inflation risk is not always explicitly defined by insurers. Some insurers include an inflation scenario as part of their ORSA. Currently, the Solvency II Standard Formula does not include a capital requirement on inflation risk as part of the market risk module. We believe, this is mainly caused by the lack of urgency; over the past years the inflation was well below the target rate of 2% and hence it was not on the list of emerging risks. However, if an insurer has an internal model in place, then it is observed that there is an inflation risk module present. If the price levels rise – and with the price levels the claim amounts – then it is observed that insurers try to mitigate this risk by setting up hedging policies. This is more typical for Life insurers than for Non-Life insurers, mainly because of the longer duration and inflation linked products. This hedging is achieved by using inflation swaps for example. However, we note this is not always possible because of associated costs.

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