By Greg Cushard

After a remarkable three-decade run, inflation is back, adding yet another challenge for insurance buyers in an already complicated landscape. In additional to its potential for economic harm, inflation can affect insurance markets, altering exposures, liabilities, investment income and more. It will prompt insurance buyers to think differently about their program design and claim management strategies.

Rising inflation could be a more significant event for the insurance industry than the pandemic. It is important to note that most industry actuaries, underwriters, claim professionals and risk management professionals have never experienced severe inflation. Memories of its destructive power have faded and will have to be revisited. Insurers and insurance buyers will need to adjust their approaches to address those potential impacts on everything from pricing to limits adequacy


Inflation’s Effects on Insurance

The property and casualty insurance industry entered 2022 in a position of strength, with record levels of surplus. Although interest rates remained near historical lows, the industry saw net written premium rebound as the economy continued to expand.

Insurers had also largely repositioned their books, adjusting retentions, attachment points and deployed limits. Strict discipline around risk selection, pricing and terms had led to improved combined ratios and earnings.

Inflation is not a new phenomenon for the insurance industry. Claim costs have been rising steadily for some time as a result of climate change, social inflation and rapid advances in technology. As an example, the modern automobile has become heavily dependent upon technology and specialized labor, making a car far more costly to repair in 2021 than in 1991. Similarly, natural catastrophe losses have become more extreme and less predictable, with average annual losses over the last decade now exceeding $70 billion.

Traditionally, insurers have managed this upward pressure through a combination of risk selection, changes in program design and premium increases. The current inflationary outlook, however, is far more complex and presents both challenges and opportunity for the industry. Relevant considerations include:

EXPOSURES: Across myriad industries, supply chain and macroeconomic challenges are increasing the cost of lumber, energy, commodities and labor. These increases contribute to higher wages, vehicle repair costs and building replacement values. Having already absorbed a significant run-up in premiums, insureds now face the potential for rate increases to be amplified by exposure changes. It will be critical to distinguish between real and nominal changes in exposure: Are payrolls or sales going up because of increased risk or simply because of inflationary pressure?

INVESTMENT INCOME: U.S. P&C insurers manage approximately $2 trillion in assets. Insurers typically maintain highly conservative investment strategies, with bonds, fixed income instruments and cash comprising 75% of their portfolios.

Over the past 10+ years, a persistently low interest rate environment has led to a steady decline in investment income and put more pressure on underwriting profitability. In fact, at 2.9%, net investment yields on P&C assets in 2021 were the lowest since 1960.

As the Federal Reserve focuses on raising interest rates, yields on 10-year Treasury notes have climbed to 3%, presenting insurers with an opportunity to reposition their portfolios and boost investment income. This is not as straightforward as it may appear, since insurers generally structure investments to match expected payments of the loss reserves they support

LIABILITIES. Insurers and insureds maintain loss reserves to pay for claims that are known and/or incurred but not reported (IBNR). These reserves are generally established with an assumption that inflation will not materially change during the life of the claim.

When inflation rates run higher, loss reserves will need to be adjusted. This may take the form of more conservative initial loss estimates or increased adverse development over time. Carriers are closely watching the impact of inflation with concerns that volatility around future payouts could have a negative impact on underwriting income.


Several Recent Trends are Worrying

  • Between 2015 and 2019, nuclear verdicts and social inflation drove the median of the top 50 jury verdicts in the U.S. up from $28 million to $90 million, eroding carrier profitability, according to National Law Journal data.
  • Workers’ compensation claims present unique challenges as respects benefits pegged to rising wages. Healthcare costs are also a major component of any claim. Although medical inflation remains low — rising just 3.5% from April 2021 to April 2022 — healthcare experts worry that industry wages, worker shortages and supply chain costs could soon lead to an escalation in pricing. This could be particularly challenging in states where injured workers are entitled to lifetime benefits.

The inflationary pressures facing the economy will not be resolved quickly or easily. Fed actions will help reduce demand but do little in terms of supply. Faced with this reality, insurance buyers will need to think differently about their program design and claim management strategies. They will also have to consider whether past performance is still relevant as respects future trends.


Greg Cushard is a senior vice president, Lockton Partners, LLC. For 13 consecutive years, Business Insurance magazine has recognized Lockton as a “Best Place to Work in Insurance.” Lockton was named among the 2021 Best Managed Companies by Deloitte and the Wall Street Journal, a program that recognizes excellence and honors private companies for their strategy, execution, culture, and financials. For more information, visit