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What does inflation mean for the insurance market?

November 17, 2022

Inflationary pressures have been building in the insurance market for several years. In 2022, this has reached a tipping point. Insurers may need to review their business strategies to keep pace with the growth in inflation-driven exposures.

It’s been more than two years since the Prudential Regulation Authority (PRA) released their ‘Dear Chief Actuary’ letters, expressing concerns that “insufficient consideration is being given to how inflation could impact long-tailed classes of business. Allowance for inflation is often implicit only and poorly substantiated”.1

The PRA was concerned an under-appreciation of claims inflation experience not only impacts the understanding of historical experience – the view on reserving adequacy – but also how to adjust historical experience to reflect today’s terms – the view on pricing adequacy.

Similar concerns on whether pricing has kept pace with underlying exposure growth due to inflationary impacts, have also been mentioned in industry press.

Fast forward to 2022 and the PRA’s concerns take on a more urgent meaning. Russia’s invasion of Ukraine, along with further Covid-related lockdowns in China, have added to supply chain issues and increased inflationary pressures.

Factors such as these, combined with wage inflation, are all reasons why the Bank of England expect inflation to keep rising in countries such as the UK.2

In this article, we look at the underlying drivers of claims inflation and highlight some actions insurers may want to consider to reduce inflation-driven exposures across their portfolios.

A long-term view of inflation trends

The graph above3 shows annual consumer price inflation for key worldwide regions over the last 10 years.

It illustrates that allowing for an arbitrary 1-2% inflation each year may have been significantly underestimating the impact of inflation over recent years.

This is particularly important given that inflationary allowances are often applied cumulatively to bring historical experience into today’s terms.

But this view doesn’t take account of the full impact of rising costs.

As well as general price inflation, we have seen rising wages, legal and medical costs, and large jury awards in emerging areas of general liability, all of which have shown substantial increases over the last decade.

WTW’s latest Claim Cost Index, which considers price indices for major lines of business written by property and casualty insurers, shows that composite insurance inflation continues to outpace general inflation.4

Inflation levels may also vary by company size, geographical region, and industry as well as other factors. In some cases, it’s not always easy to quantify the true impact of inflation with certainty and this adds another layer of uncertainty.

As discussed above, events in 2022 have made these considerations more acute. A recent Goldman Sachs Insurance Asset Management survey saw inflation as being an “immediate focus for insurers, with 79% of global respondents anticipating it to be a concern in the next year.”5

How are insurance and reinsurance markets responding?

In North America insurers are increasingly reviewing client’s property valuations and business interruption pricing methodologies to make sure they take account of inflation.

We’re witnessing higher rate increases from the major reinsurers where they have no evidence that valuations have been adjusted and recalculated to reflect inflation.

However, we’ve also had success mitigating this where we have been able to share detailed up to date information, achieving flat renewals in some recent cases.

Top reinsurers at the industry’s annual gathering in Monaco warned that global geopolitical tensions, high inflation and climate change have heightened demand for risk protection and will lead to increased premiums.

What can insurers do to manage their exposures?

The impact of inflation reaches into every aspect of insurers’ business planning, strategy and forecasting. The graphic below, shows some of the areas that could be affected:

A chart showing the different ways inflation could affect insurers’ business planning, strategy and forecasting.
Different ways inflation could affect insurers’ business planning, strategy and forecasting.

Key issues to consider include:

Reserving: insurers may need to look again at their reserving strategies and consider buying more reinsurance if they find their existing arrangements may not meet future inflation-impacted exposures, including long-tail liability claims.

Investment: inflationary pressures can bring investment opportunities as Central Banks raise interest rates to combat high inflation. Increased returns on investment can be seen as a mitigating strategy to help balance some of the inflation risk experienced in the underwriting side of a portfolio.

Pricing: insurers will need to consider whether their pricing has kept in line with the growth in exposures caused by claims inflation due to inflation.

Portfolio management: inflationary pressures may be seen across different parts of an underwriting portfolio. Insurers need to understand the correlations between business lines to take a pro-active approach to quantifying, and managing, inflation risk.

How can WTW help?

WTW can support insurers to manage inflationary pressures by:

  • Helping you understand the range of inflationary drivers and their impact on the cost of claims across the portfolio.
  • Scenario planning to stress-test your financial resilience to inflationary pressures.
  • Helping you quantify inflation and embed inflation considerations into a range of business processes and risk management feedback loops.
  • Offering advice on how to manage inflation risk, including amendments to reinsurance contracts, where appropriate.
  • Highlighting where processes may need to be developed to incorporate the impact of inflation.


1 Letter from James Orr: Feedback from recent PRA reserving reviews

2 When will inflation in the UK come down?

3 World Development Indicators

4 Composite insurance inflation continues to outpace general inflation

5 Re-Emergence: Inflation, Yields, and Uncertainty


Head of Data & Analytics, Direct and Facultative

Andy McCullagh
Head of North American Property GB
Global Facultative, WTW

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