Euro inflation pressure broadening out, core CPI rises to new multi-decade high: Swiss Re Institute

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A new report from Swiss Re Institute states that Euro area inflation pressure is broadening out and becoming “stickier”, as core Consumer Price Index (CPI) rises to a new multi-decade high.

The current inflation surge is also increasing claims severity for European property and casualty (P&C) insurers, particularly in property and motor insurance.

The report notes that while Euro area aggregate core CPI inflation, which excludes volatile energy and food prices, may only be roughly half the level of other advanced economies, 3.5% y-o-y as of April, versus 6.2% y-o-y in the US and UK,  is still at a multi-decade high and shows signs of intensifying.

In addition, the report notes that it expects some pick-up in euro area wages and healthcare costs in the medium term, with liability and bodily injury claims also expected to follow suit. At the same time, European services prices are beginning to pick up, currently at 3.3% y-o-y, the highest since 2002.

The authors of the report, Roman Lechner, P&C Economic Research Lead, and Charlotte Mueller, Chief Economist Europe, both at Swiss Re, warn that for Europe’s P&C insurers, inflation means higher claimer costs, which erode profitability, and by lines of business, motor and property insurance are “bearing the brunt” of the immediate claims cost impact of this inflation shock.

The report adds: “The longer the inflation surge lasts, and the more it broadens out to wages and higher healthcare costs, the more it will drive up bodily injury claims, which are relevant for accident, motor liability and general liability insurance. This would not only negatively impact current claims, but also claims reserves for unsettled claims from prior years.”

Moreover, in addition to higher claims costs, inflation also has negative impacts on insurers’ administration expenses, mostly driven by eventually increasing wages.

Furthermore, Swiss Re Institute notes that insurers can take some underwriting actions to mitigate the effects of prolonged inflation and address the challenging claims cost environment.

This includes, re-pricing of insurance risks to reflect elevated claims costs, especially for more persistent inflation pressures, diversifying and steering new business towards products with lower risk profiles, and indexing, i.e. linking premiums and covers to CPI helps to stabilise and avoid onerous re-pricing exercises.

Meanwhile, analysts at Gallagher Re have recently suggested reinsurance adjustments to mitigate inflation pressure.

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