As insurance and reinsurance professionals, many of us have experienced hard and soft markets throughout the various industry cycles. However, fewer of us lived through a time when increased inflation is so sudden and potentially persistent across all regions around the world at the same time. How we got here — monetary and fiscal policies before and during Covid, supply chain disruptions, the Ukrainian and energy crisis — is less important than what we do moving forward. This new situation is a game-changer for the long-term profitability and sustainability of our industry.
As a result, our collective actions as business leaders will be decisive.
The fact is that inflation has caused a sudden paradigm shift that impacts every facet of the insurance and reinsurance equations. The effects of general inflation and social inflation will compound and feed off each other. This is particularly true on long tail lines, where the propensity for juries to render nuclear verdicts will continue to increase in the context of a looming recession and its ensuing social and financial hardships. And all of this is happening at a time when the frequency and intensity of climate-related catastrophes are drastically increasing, further placing strain on the integrity of financial systems.
From risk selection and pricing to claims, reserving and investment, any active portfolio management strategy will now require an element of active calibration to include these complex and ever-evolving considerations. This is true for all lines of business, from first party to third party and specialty products. The targeted profitability of a segment or line of business will come down to mastering the art and science of risk, as well as the dynamic measurements of macroeconomic and industry specific data points with a high degree of sensitivity.
We need to communicate and share. More often. More efficiently.
So, what can we do collectively to ensure that our industry continues to thrive and fulfil its most important mission of being the sustainable enabler of all human activities?
We need to communicate and share. More often. More efficiently.
First, internally. A robust feedback loop has never been more important. Pricing and reserving actuaries, underwriters, claims professionals, distribution leaders, modelers, finance and reporting teams, investment officers: all need to confront their respective views on the part of the insurance and reinsurance process that they own. What scenarios are they using? What assumptions are they making as a result? How sensitive are these to parameter changes and deviations? How do they measure the evolution of the metrics they follow? How often do they intend to revise their approach? The answers to all these questions need to be systematically captured and shared within an established information exchange framework, so everyone has a common and always up-to-date understanding of a line of business strategy and performance in this ever-changing environment. Portfolio optimization adjustments will require both agility and responsiveness. Continued training of underwriters and other risk professionals on inflation-related matters will be paramount.
Second, externally. We need to confront our view of risks with others’ reality: Insureds, brokers, cedents, reinsurers and retrocessionaires. How do companies mitigate the inflation risk within a specific industry? How do insurers factor inflation into their underwriting strategies from a program structure, terms and conditions, and pricing standpoint? What are the long-term scenarios they are embedding into the calibration of their portfolio optimization models? How do reinsurers and retrocessionaires ensure transparency on these important data points to avoid adding pricing loads to books of business already appropriately managed from an inflation standpoint?
We must act immediately and decisively to factor inflation into all dimensions of the insurance and reinsurance value chains. The resilience of many parts of society depends on the long-term sustainability of the insurance offering. The “how” is on us as industry leaders. It starts with a shared willingness to ask the right questions.
