Stagflation to impact P&C insurers’ profitability

The market is expected to harden in 2023.

After 50 years, stagflation is back on the radar and 2022 will be a challenging year for insurers, according to Swiss Re chief economist Jérôme Jean Haegeli.

Stagflation is described as when the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.

For insurers, stagflation will greatly affect the profitability of property & casualty insurers.

Swiss Re predicts that lower equity markets and widening credit spreads will likely lead to mark-to-market valuation losses on assets and capital, with P&C insurers most likely to be exposed to the inflation shock, which will increase claims severity. 

“In the near term, property and motor will likely be hit hardest, as price rises in construction and car parts outstrip those in the wider economy. We see headwinds to P&C profitability in 2022, but also tailwinds from further rate hardening in 2023,” Haegeli said.

Meanwhile, for life & health (L&H) insurers, sustained high inflation has primarily indirect effects, as rising interest rates support profitability. Investment results benefit as bond portfolios roll over into higher yields, whilst the profitability of saving products with guarantees – a large legacy book of the life industry – improves. 

The nature of fixed-benefit products insulates them from claims inflation, though indemnity-based health insurance is exposed to claims pressure in the near term. However, Swiss Re said they expect higher inflation to erode consumers’ disposable incomes and the value proposition of (in-force) saving policy benefits, resulting in higher rates of lapse and surrender.

“After a 50-year absence, stagflation is fully back on the radar and we need to be disciplined. 2022 will be a challenging year for insurers, with both sides of the balance sheet under pressure. The silver lining is that we are exiting the low-for-longer and negative interest rate environment and this regime shift will benefit insurance companies over the medium term,” Haegeli said.

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