Impact of Inflation on Insurance

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.

Digitalisation is one obvious route to achieve this objective in areas such as distribution (the biggest non-claims cost block), marketing and customer service.

Inflationary episodes typically cause lower economic growth or even recessions, which hurt demand for insur-ance, especially in areas where customers consider insur-ance a discretionary or non-essential expense.

However, we argue that for customers, and society at large, the value of insurance increases in times of inflation, for the following reasons:

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.

More generally, as professional absorbers and managers of risk, macroeconomic shocks such as unexpected inflation challenge insurers’ role in society, but they also offer opportunities.

With that in mind, this research report offers the following conclusions and recommendations for insurers, policymakers and regulators:

With claims payouts based on indemnity, health insurance is as vulnerable to inflation as P&C insurance, both due to higher claims and the risk of reserve deficiencies. On top, as mentioned before, health cost inflation typically exceeds consumer-price inflation.

Most life insurance products, e.g. mortality, wealth accumulation and longevity protection, offer benefits that are nomi-nally fixed. Payouts are defined at the inception of the policy and not indexed to inflation. Therefore, and in stark contrast to non-life insurance, the effect of inflation on life insurers’ earnings is neutral for most segments of business. This is not the case, however, with certain morbidity products, such as disability and long-term care, which typically offer cost-of-living adjustments.

Lower equity markets, rising interest rates and widening credit spreads adversely affect insurers’ balance sheets through mark-to-market valuation losses.

However, as outlined before, eroding inflation-ad-justed incomes, slower economic growth and price increases may offset those effects. Changes to the product mix are expected to favour life insurance penetration as savings-type policies become more attractive. In non-life lines of business, on the other hand, insurers’ reduced risk appetite and shift to more short-tail products may weigh on premium volumes.

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