High Inflation Hiked P/C Claims Costs Up to 7.5% in 2022

April 17, 2023 by

High inflation alone led to an increase in property/casualty claims of 5%-7.5%, across five key markets in 2022, according to Swiss Re research.

“In 2023, we expect that inflation should lead to an additional increase of 3.5-6.5%,” said Swiss Re Institute’s Economic Insights report, titled “Inflation may be easing, but claims severity pressures in P&C remain,” which analyzed inflation and pricing trends in Germany, France, the UK, Australia, and the U.S.

For property, a short-tail business that is immediately sensitive to the effects of inflation and rising construction costs, the report estimated a 6%-13% increase in claims payouts in 2022, with an additional 3.5%-10% hike expected for 2023.

“The high-inflation environment has been expensive for P&C insurers. The losses from Hurricane Ian at the end of 2022 contributed to a worsening of the P&C loss ratio, but the main driver was the sharp increases in economic inflation,” the report said.

Swiss Re suggested that P/C rate increases achieved in 2022 were not enough to offset the upward pressures from other non-economic factors, such as social inflation and increased loss frequency in motor and property lines.

Indeed, premium income should have risen 13% in 2022 in order to offset inflation-driven claims gains, said Swiss Re, noting, for example, that property premium income fell short of rising claims costs in Australia, Germany and the UK.

Swiss Re expects P/C claims growth to ease in 2023, along with the decline in inflation. Alongside a repricing in loss-making areas during recent primary market renewals, some of last year’s underwriting pressure may be alleviated, the report continued.

However, the report cautioned insurers to maintain underwriting discipline in pricing and terms and conditions because inflation is likely to continue to affect many claims-relevant price categories, such as labor and medical costs.

The average combined ratio in P/C insurance in Swiss Re’s profitability analysis of eight major markets — Australia, Canada, France, Germany, Italy, Japan, the UK and the U.S. — rose to 99.3% in 2022 from 96% in 2021, driven mostly by inflation.

In France, the loss ratio in P/C in the third quarter of 2022 was 9 percentage points (ppt) higher, year-on-year, while in the UK, the loss ratio for motor was up 5.1 ppt in the same period.

In the U.S., the motor physical damage loss ratio reached 84% for 9M2022, almost 20 ppt above the annual average of the 10 years before the COVID-19 pandemic, Swiss Re said. For 2023, Swiss Re forecasts a P/C combined ratio of approximately 98%, close to the pre-COVID-19 level of 97.7% in 2019.

Inflation Drivers

Swiss Re noted that some of the inflation drivers seen over the past few years will ease somewhat in 2023.

“Cost increases in construction, which peaked in 2022, should ease but will remain high by historical standards, as building activity is still strong and China’s re-opening will increase global demand for commodities,” the report said. For example, the producer price index for construction (PPI-C) is expected to rise by 8% this year in the UK, and by 11.4% in the U.S.

Cost rises in motor vehicle repairs and replacements should ease in most key markets, but will still be above pre-pandemic levels, the report noted.

Other inflation drivers include tight labor markets (which will increase wages) and backlogs of medical procedures (which will increase healthcare costs).

Swiss Re explained that ongoing elevated costs will put on long-tail lines of business in casualty and motor liability.

The report was authored by Arnaud Vanolli, economist; Roman Lechner, P/C Economic Research lead, and Li Xing, head Insurance Market Analysis — all with the Swiss Re Institute.