Inflation spike dents industry earnings outlook
Motor and property lines will “bear the brunt” of the immediate claims cost impact of the current high-inflation environment, straining overall industry earnings, Swiss Re says in its latest Sigma report.
Slowing economic growth is also expected to weigh on the non-life sector, the report says, projecting the industry is set for a combined ratio of 101% this year, slightly worse than the 100% it recorded last year.
Return on equity will likely deteriorate as well, to around 5-6% this year compared with 6% last year.
Swiss Re says the inflation impact on claims will offset the improvement in profitability it had previously anticipated from ongoing rate hardening in commercial and also in some personal lines insurance.
“The main inflation impact will show in rising claims costs, more in non-life than life insurance in which policy benefits are defined at inception,” the report says.
“In non-life insurance, inflation means higher claims costs – that is claims inflation – and these erode profitability. By line of business, motor and property insurance will bear the brunt.”
The report says in construction, supply disruptions and labour shortages have led to an increase in repair and rebuilding costs, and in turn higher claims cost.
In motor, claims costs have risen as shortages of parts have kept the prices of new and used vehicles historically high.
“These are not easy times, and the insurance industry will need to keep a close eye on inflation,” Swiss Re Group Chief Economist Jerome Haegeli said.
The reinsurer estimates non-life premium growth globally will slow to 0.8% this year in real terms from 2.6% last year. For next year a 2.2% growth is on the cards, based mostly on ongoing rate hardening, notably in commercial lines of insurance business.
Total premiums globally – comprising of non-life and life – are still on track to surpass $US7 trillion ($10.4 trillion) in nominal terms to reach about $US7.3 trillion ($10.8 trillion) by the end of this year, Swiss Re says, standing by the prediction it made in September last year.
“This is based on our expectation of more rate hardening in non-life to counter high inflation and strong premium growth in emerging markets,” Swiss Re says.
Non-life premiums are forecast to rise by 7.1% to $US4.1 trillion ($6.1 trillion) and life premiums by 4.8% to $US3.1 trillion ($4.6 trillion).
Swiss Re says the projected rise means total premiums globally will be 17% higher than at the end of 2019, months before the covid pandemic broke out.
“The increase over that three-year time span reflects the overall resilience of insurance markets over the course of the pandemic, and also last year’s strong recovery,” the report says.
Click here to download the report.
