Inflation a Threat for Reinsurance

Emily Holbrook

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February 1, 2010

Future inflation may affect reinsurers' profitability across all lines of business, according to global professional services firm Towers Perrin. The world's fourth largest reinsurance intermediary recently reported such news, claiming that casualty lines would be hit hardest in an inflation spike.

"When it comes to reinsurance contracts, where several years often elapse between rates being set and claims being paid out, inflation is a potential threat and can become a real problem," said Ross Howard, COO for Towers Perrin's reinsurance brokerage business in Europe. "Historically, inflation has caused larger future claims, and, in the current climate, the industry is not likely to be able to factor this into pricing."

The report estimates that the impact of an inflation rate of 3% would be that claims costing $1 million today would cost a reinsurer $1.11 million on average. It is important to also note that inflation can have a knock-off effect on frequency-meaning that periods of high inflation generally correspond with a greater number of claims. An inflation high point of 3.4% in 2000 was followed by a loss ratio of 99% on casualty lines in 2002, for example. It remains to be seen if, as a response to rising inflation, reinsurers will reduce their casualty writings, as they are already taking a hard look at their casualty books.

 
Emily Holbrook is the founder of Red Label Writing, LLC, a writing, editing and content strategy firm catering to insurance and risk management businesses and publications, and a former editor of Risk Management.

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