Prolonged inflation could weaken reinsurers’ credit profiles
Reinsurers’ credit profiles could be weakened if current high levels of inflation persist as the world emerges from the coronavirus pandemic, Fitch Ratings says in a new report.
The reinsurance businesses that would be most affected include long-tail lines, such as general liability, medical malpractice and workers’ compensation, and excess-of-loss reinsurance treaties with fixed deductibles.
Consumer price inflation (CPI) across Europe and the US, the two most important regions for reinsurers, has accelerated since 2Q21 due to a sharp economic rebound, loose monetary policy and supply chain disruption.
Fitch’s base case is for high inflation to be short-lived, but if inflation significantly exceeds our expectations over the next two years or more, reinsurers could face margin pressure in their short-tail business lines and reserve deficiencies in their long-tail lines.
Higher CPI is leading to higher claims inflation in reinsurers’ short-tail business lines due to rising repair costs for buildings and vehicles. Reinsurance prices are increasing accordingly but may struggle to keep pace if high claims inflation persists, particularly if pricing again becomes as competitive as it was in recent years.
A short-lived period of high inflation should not materially affect reserve adequacy for long-tail business lines, such as motor liability, workers’ compensation or directors’ and officers’ insurance. The reserves are long-term and we believe they already allow for a relatively high level of future claims inflation.
However, if high inflation persists – or if reinsurers start to expect it to persist – then reserve deficiencies could arise on some long-tail business classes. The profitability of workers’ compensation insurance in particular could suffer if medical costs rise significantly given that premium rates for this business line have recently been flat or declining.
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