Inflation Threat

The potential impact of inflation on insurers and reinsurers is a growing concern among industry commentators. On Friday, Towers Perrin warned that future inflation may damage reinsurers’ profitability on all lines of business, with casualty lines hardest hit, leading them to reduce the business they write next year. Towers Perrin estimates that an inflation rate of 3 percent would mean a $1 million claim today could cost a reinsurer $1.113 million on average tomorrow. A five percent inflation rate could result in a claim of $1.195 million – 119 percent of the original claim size. Towers Perrin makes the point that because several years often elapse between rates being set and claims being paid out under reinsurance contracts, inflation is a potential threat and can become a real problem. In addition to claim severity, inflation can also have a knock-on effect on frequency. Periods of high inflation generally correspond with greater numbers of claims. Looking at historical loss ratios for casualty lines, Towers Perrin says the impact of inflation can be seen with a two-year lag. An inflation high point of 3.4 percent in 2000 was followed by a loss ratio of 99 percent on casualty lines in 2002. Conversely, an inflation low point of 1.6 percent in 2002 saw loss ratios fall to 73 percent in 2004. Check out I.I.I. information on reinsurance.

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