Inflation pinches 'high-margin' liability lines' profitability

Inflation pinches ‘high-margin’ liability lines’ profitability

February 27 2023 by Blake Evans-Pritchard

Asia’s liability insurance market continues to grow strongly, but rising inflation in the region as countries pull out of Covid-19 could undermine the healthy levels of profit that insurance companies are currently seeing.

“Inflation is going to hit all those insurers, especially local insurers, who are playing in the liability market and thinking it’s a high-margin game,” said the Asia head of a Lloyd’s insurer.

He added that the 1:1 renewals in January hit a lot of local insurers hard, especially in South-East Asia, as reinsurance firms demanded higher levels of retention and raised rates. Acumen, a consultancy, predicts liability cover in Asia to grow at a compound annual rate of 6% between now and 2030.

“Many local insurers are looking to write more liability business, because they can keep more [of these premiums] on their books and the immediate cost of reinsurance hasn’t gone up quite so much,” said the Asia head. “But in the long-run liability insurance can be difficult to make money on because you need to put away several years of reserves.”

Clemens Philippi

“The current level of profitability may not be sustainable, especially for employers’ liability and public liability, going forward as countries recover out of Covid-19.”

Clemens Philippi, MSIG Asia

Liability insurance is particularly susceptible to inflation because it tends to be a long-tail business, with claims not appearing for a number of years – at a time when lawyer fees, litigation costs and medical bills may be much higher than they are today.

“We have observed that liability classes such as employers’ liability, public liability, public indemnity and directors and officers [insurance] is and will continue to be one of the core areas in non-life insurance in Asia due to compulsory coverages and emerging segments,” says Clemens Philippi, CEO of MSIG Asia.

“However, the current level of profitability may not be sustainable, especially for employers’ liability and public liability, going forward as countries recover out of Covid-19.”

Some think that the danger of inflation may even have been underestimated in the region.

“We are seeing inflation across the Asia region increase to levels higher than originally predicted,” said Ciarán O’Shaughnessy, regional head of liability for Asia Pacific at Allianz Global Corporate & Specialty (AGCS).

“A period of prolonged high inflation, coupled with other macroeconomic factors, could lead to a recession in certain parts of the region, which would also impact insurers.”

He added that the impact of inflation on liability insurance is expected to be “material, but probably not as significant as other lines, such as property and construction”.

The cost of personal injury claims – a key component of many liability insurance lines – could also increase in the region, “driven by CPI, wage growth and increasing cost of medical care”, said O’Shaughnessy.

Delays in claim settlements due to Covid-19 may also cause some uncertainty when it comes to reserving as these start manifesting themselves during the post-Covid recovery.

According to Nicholas Tey, regional manager for Asia at Beazley, the impact of inflation on the liability book can be harder to quantify compared to, for example, its impact on property insurance – which can make accurate reserving more difficult.

“Whilst short-tail lines see a more immediate impact, the long tail insurance products such as general liability are also subject to inflationary pressures, particularly as it relates to prior year reserves.”

Debra Burford, Zurich Insurance

Underwriting discipline
All of the points above serve as a reminder to the insurance industry that it needs to retain good underwriting discipline, especially for longer-tail businesses, where the costs may not be immediately obvious.

Debra Burford, chief underwriting officer of APAC for Zurich Insurance Group, said that it is very important for insurers to properly take account of inflation when writing these policies.

“Whilst short-tail lines see a more immediate impact, the long tail insurance products such as general liability are also subject to inflationary pressures, particularly as it relates to prior year reserves,” said Burford.

“We cannot speak for other insurers, but from our perspective, we do take inflation into account when we underwrite. Often claims are paid significantly later than when the premium and terms were initially set; therefore, as part of our assessment we consider what we call the development of claims, which also will include our best view on any inflationary aspects.”

AGCS views inflation as a key business risk that needs very close monitoring.

“We work with our pricing teams to continually review inflation levels by tracking publicly available indices in countries where we pay losses, as well as seeking local input, and the findings are built into our loss trend assumptions and pricing tools,” says O’Shaughnessy.

This extends across business lines and includes liability insurance.

Whilst insurers in Asia clearly do need to pay close attention to the dangers that inflation poses as they seek to grow their liability business, the one extenuating feature of the region is that many countries in APAC do not tend to be as litigious as, for example, Europe or the United States. The one exception is Australia, where social inflation has been ticking up recently on the back of rising litigation funding.

“Comparatively and generally speaking, the inflation impact on liability insurance will be greater than the other lines but its extent is dependent on the social inflation component,” said MSIG’s Philippi. “For Asia, we foresee that the impact of social inflation is likely to be benign due to the relatively non-litigious environment in our region.”

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