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High inflation and low growth: How risk managers can take control

By Arun Kurian and Eamonn McMurrough | November 30, 2022

Global conditions have increased scrutiny on risk and insurance managers’ decisions.
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Economic Challenges

Current global conditions mean risk and insurance managers' decisions are facing greater scrutiny. How can they uncover the opportunities within their insurance and risk budgets and defend the business against underinsurance?

8.8% forecast for global inflation to peak in 2022 (IMF).

The International Monetary Fund (IMF) has forecast global inflation will peak in late 2022, increasing from 4.7% in 2021 to 8.8%, and remain elevated for longer than previously expected. The IMF also predicts global growth slowing, from 3.2% this year to 2.7% in 2023.1

These conditions make corporate planning more challenging, putting finance directors under pressure to conserve cash, and potentially requiring risk and insurance managers to justify their budgetary allocations just as the demand for insurance is going up.

Inflation is expected to impact insurance programmes in several ways:

Need for higher limits

While the impact will differ across various lines, higher inflation will lead to changes in exposure. For property, this means the value of assets will increase, translating into the need for higher insurance limits. For liability, meanwhile, higher price inflation is expected to drive claims inflation, meaning limits could be breached unless they are increased.

Value of claims being retained increasing

As the size of claims increases, the value of claims being retained – within deductible or quota share – is also likely to increase on average. More claims may also breach the existing limits and fall back on the balance sheet.

Higher size and frequency of losses leading to higher premiums

Small claims below certain thresholds may previously not have been reported and instead retained within the business. Inflation will cause these claims to breach those thresholds, making them more likely to be reported. This increases both the total frequency and number of losses seen by insurers, likely leading to higher premiums, higher deductibles, or both at renewal.

Higher total cost of risk (TCOR)

TCOR is likely to be higher due to increased losses being retained within the business, together with likely higher renewal premiums. Rising interest rates would also increase the cost of financing the losses retained within the business.

Risk and insurance managers can use analytics to both justify insurance and risk budgets, as well as ensure these are utilized efficiently. Instead of being reactive and accepting the terms set by the insurance market, they can devise quantifiable strategies proactively, well in advance of renewals. Below, we consider specific steps to help you do just this.

Apply metrics to set the risk tolerance

What level of loss would threaten your organization? Expressing this through the key financial metrics most useful to the organization connects the risk strategy to the business financial priorities. This clarifies the decisions on risk financing versus insurance purchases, and the levels of risk to retain.

For example, setting the risk tolerance as 5% probability of earnings per share (EPS) falling below $0.75 directly links the risk strategy to the CFO's objectives. This also creates a common financial framework for communicating with key stakeholders and demonstrating the value of risk investments.

Quantify the risks

Use past data to estimate the losses expected in the future for each risk. Where the organization has no historical data, for example around cyber risk, use expert judgment or crowdsource the likelihood and impact of different risk scenarios.

Actuarial models can help quantify not only an average estimate of the likely losses in a future time period but also the volatility of the losses. This can result in outputs such as: “We expect $5m of losses next year but there is a 1-in-100 likelihood the losses could exceed $125m.”

Where the risk is insurable, this can help the organization decide the levels of insurance to buy, and what they can expect to retain on the balance sheet with different deductible levels. Analytics can also show which option would result in the lowest TCOR.

Take the portfolio view to reveal opportunities

Inflation is not likely to hit all risks in the same way. Looking at all risks together at a portfolio level will help you identify the potential opportunities given this reality.

There could be potential for arbitrage, for example, buying higher limits or reducing deductibles where pricing is cheaper and vice versa. Where insurance market conditions are inefficient, it might even be possible to reduce the total spend while maintaining, or even reducing, the total risk.

This can be extended further to look at not only insurable risks but all risks. Perhaps the most efficient use of the risk budget is a greater focus on reducing those risks that cannot be transferred to the insurance markets. For example, the risk budget could be better utilized in diversifying supply chains, or installing sprinklers in certain premises.

Implement and recalibrate

Inflation and growth expectations will keep changing, new risks will continue to emerge, and risk strategies will have to keep evolving with the times.

However, having a proactive, analytical, wide-angle framework in place will ensure risk and insurance managers are addressing the external environment from a position of strength, one that better equips them to protect their organizations from underinsurance and reveals the optimization opportunities.

Discover how analytics can enable greater control in challenging economic conditions, get in touch.


1 IMF Report


Client Development Director and ESG Market Leader
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Senior Director, Client Relationship Management, Risk & Analytics
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Directeur France, Strategic Risk Consulting, Risk & Analytics,
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