SIRC: Inflation hard to ‘put back in the bottle’ as digitalisation ‘imperative’
November 2 2022 by Andrew Tjaardstra
Rising inflation and its impact on Asia Pacific’s (re)insurance market was the key topic of a panel discussion at the Singapore International Reinsurance Conference 2022 (SIRC 2022) on November 1.
Rachel Turk, group head of strategy, Beazley said: “It is hard to unbundle P&C premiums increase from inflationary pressures – total insured value and a hard market, e.g. challenging Florida renewals. We would expect to see some P&C price increases . . . to match increased claims costs and improve loss reserves. In addition, wages, supplier, travel and entertainment costs are all set to go up. And the CPI index doesn’t include steel and lumber which are driving up property claims.”
She added: “We are supply and driven market and many lines are now coming off a hard market and it will be hard to raise prices.”
Turk also said that social inflation is another problem for the market. She explained: “There is a drive to punish large corporations with large pockets. The income gap drives this. We get a bigger disparity between the wealthy and the poor. There is no central response to social inflation which is higher settlement costs and the fear of higher settlement costs. Insurers work with clients and defense lawyers to settle things in advance. Insurers are putting on around about 8% load for social inflation.”
John Zhu, chief economist Asia, Swiss Re Institute, said: “The Fed’s aggressive rise of interest rates is adding inflation to Asia. [On the other hand] the domestic weakness in demand is holding back inflation in China. Disasters and crops could lead to greater inflation in the summer of 2023. Asia has around half the inflation of what the US and Europe and is relatively low compared to the average.”
Hong Kong-based Zhu added: “Central banks are finding this kind of inflation to put back in the bottle – especially the 2% target. Workers are increasing their wage expectations and this hasn’t come through in the data yet. The solution is to increase interest rates.”
Data lag
Matthew Rose, head of capital solutions and life, Asia, Guy Carpenter, warned of a data lag.
He explained: “Non-life companies face a lag between recognition of inflation and being able to charge that to clients. That lag comes from data and also competition and consumer push back. On the long tail classes, delays can happen over many years and revaluation of assets at all at once can cause headwinds."
Commenting on the startling situation, Michael Menhart, global chief economist at Munich Re, said: “There is a high degree of uncertainty in Europe and the US. Economic and inflation forecasts have been revised to a degree I haven’t seen before. We will see stagnation in the US and a recession in Europe which will depend on the weather in the winter and how much gas will need to be limited. Inflation rates are at record highs. For Germany you would have to go back to the 1950s to see such a high level."
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“The cost of a digitisation has gone up because of inflation but we need to think more long term – this is three-to-five year transition."
Rachel Turk, Beazley |
Menhart said: “Pricing has to include inflation development and it will be necessary to raise rates. The market needs to prepare for upside surprises on inflation. The more important view is the long-term view. Drivers such as globalisation and productivity gains have lost drivers and central banks have a very difficult task."
He warned: "This is the final battle for credibility for central banks. I would expect many more rate hikes beyond what people are expecting now because otherwise it is over for their credibility. There is a change in the global economic era. Some [changes[ are painful -- you can’t push the pain into the future – including for risk adequate pricing – sooner or later we will have to do it."
Menhart continued: "Central banks are pouring so much into solving problems that people don’t feel the same any more. We will see much more government intervention in the corporate world. Deregulation is over and governments will require a lot more from the corporate world than in the past."
The panel and audience agreed that reinsurers will become more important in Asia Pacific amid heightened economic uncertainty and growing economies.
Digital imperative
Despite the headwinds, there is still a huge imperative for the market to improve its technology across the board.
Beazley'sTurk said: “We have to digitise – it is imperative and insurance is a laggard in this. The irony is that the cost of a digitisation has gone up because of inflation but we need to think more long term – this is three-to-five-year transition – we need to start now."
Turk added: "We also need to think about longer term client relationships. We are trying to rebuild public trust after the pandemic – new products and solutions could help underinsurance."
Guy Carpenter's Rose noted: “Those that have gone down the digitisation path will be reaping the benefits. There are also challenges in getting the right workforce [to help drive the digital pathway].”
Kai-Uwe Schanz, deputy managing director, head of research & foresight, The Geneva Association chaired the discussion.
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