Inflation concerns mount amid “easy” monetary policies: Swiss Re

Recent commodity price spikes and the current trend of “easy” monetary policy have increased inflation concerns in the insurance market, reports Swiss Re.
In its latest sigma study, ‘The Impact of Inflation on Insurers,’ Swiss Re notes that extended periods of accelerating inflation are especially problematic for long-tail lines of business.
“Insurers can mitigate the impact by adjusting premium rates, but sometimes this is not possible if regulation or the competitive environment do not allow for such adjustments,” said Thomas Holzheu, an author of the study.
The study offered other options to mitigate inflation risk.
These include:
• investing in commodities, real-estate and inflation-indexed bonds;
• modifying insurance contracts to shorten the tail, and hence the development risk;
• adding index clauses to insurance contracts that link premiums, limits and deductibles/retention to an inflation-related index; and
• purchasing a reinsurance program to protect against inflation surprises, particularly in emerging markets where the risk of high inflation is greatest.
“Insurers can introduce ‘claims made’ policies or sunset clauses to address the issue of latent claims,” said David Laster, another author of the study.
“While aggressive monetary policies and record government spending have triggered concerns that inflation could sharply increase, this is unlikely in the next one to three years because unemployment rates are elevated and there are few capacity constraints,” said Kurt Karl, Swiss Re’s chief US economist.
“But inflation could rise if monetary policy remains loose for too long and growth accelerates rapidly.”