September 10, 2009 by Canadian Underwriter
Higher inflation in a variety of forms is expected to develop into a threat to long-tail (re)insurers sometime over the next two to five years, a Guy Carpenter briefing says.
Written by Guy Carpenter managing director David Lewin, the briefing warns that low interest rates right now are bound to result in monetary inflation sometime down the road.
“Rising interest rates over the next two to five years will probably result in monetary inflation, which in itself would make it more expensive for (re)insurers to pay claims,” the Guy Carpenter briefing says.
Plus, Lewin adds, in two to five years, “the effects of such measures as ‘quantitative easing’ (i.e. a government’s pumping money into a financial system to attain near-term stability) will be visited upon long-tail (re)insurers.”
But the threat of inflation comes in a variety of forms and is not limited to monetary inflation. Other forms of inflation include:
• Legal inflation: This results from the impact of legislation and judicial decisions on settlements, judgments and jury award limits, Lewin writes.
• Social inflation: “Improved standards of living have pushed peoples’ quality of life expectations upward, making it more expensive to restore a victim to his state immediately prior to the loss occurrence,” Lewin writes.
• Medical inflation: Economic difficulties in conjunction with an aging population have made it difficult for governments to fund long-term medical care; as a result, they are interested in shifting the burden from the state over to private insurers.
All of these forms of inflation are “problematic” for long-tail (re)insurers — in the sense that they will drive up the costs of claims payments — unless (re)insurers have enough time before claims have to be paid to invest premiums and reserves,” Lewin writes.