Flexibility Is Essential For Insurers Dealing With Inflationary Challenges

Flexibility is essential for insurers dealing with inflationary challenges.INSURUCE

Inflation is unlikely to abate anytime soon, and insurers will need to be proactive and agile to remain ahead of the curve, according to Keith Buckley, managing director of Fitch Ratings’ global insurance rating business. He was presenting on the most recent Strategy Sessions webinar series from Carrier Management.

“I think the most important thing is that companies are very proactive in thinking about it and making sure that they’re thinking about it from all angles and all the different levers they can pull, so that if their vision isn’t able to be executed as they’re hoping, they can maybe change course and find another way to narrow that gap between inflation and pricing,” he said.

Part of the problem, according to Buckley, is that inflationary pressure is arriving at a time when the economy is already under stress owing to the ongoing COVID-19 epidemic, supply chain constraints, and even the crisis in Ukraine.

“We haven’t seen this level of inflation in the United States in many years, so it will take some time to emerge,” he added. “We’re in a really unusual economic scenario as a result of the pandemic lockdown and subsequent recovery, which has produced some extra issues and concerns.”

With this in mind, insurers need to prepare for inflation to endure for a number of years at even higher rates than are currently being seen, he added.

“Being ready is a very important part of a good strategy,” he said.

Using Various Levers
Pricing, according to Buckley, is one of the most important levers insurers can pull in their playbooks.

“The challenge insurers always face, and this is just part of their core business model,” he explained, “is that it’s an industry where you don’t know your cost of goods sold at the time the product is sold, which is why you employ a bunch of actuaries who can do their predictive work and try to figure out what those cost of goods might be so that they can price the product accordingly.”


However, not all lines of insurance can raise their pricing since regulatory restrictions may limit some consumer-oriented lines of business.

“Regulators in different states are quite interested in why you need to elevate these lines and whether you can demonstrate that to them and have the rate approved,” he added.

Furthermore, firms who are more gloomy about inflation and overshoot their competitors risk losing market share if their price is higher than others, according to him. Companies that underprice against inflation, on the other hand, risk falling behind the competition, expanding the gap between inflation and pricing.

Keith Buckley

“There are a variety of external influences, issues in projecting what assumptions you want to employ, and there will simply be variances in execution between firms,” Buckley explained. “Managing all of those components successfully will result in not all firms responding to this issue in the same manner.”

However, Buckley stated that he is seeing more insurers being proactive when it comes to current inflation.

However, Buckley stated that he is seeing more insurers being proactive when it comes to current inflation.

“I would say insurers are definitely considering this,” he added. “As credit analysts, we probably get more inquiries on this issue than nearly any other when talking to investors.” When we talk to insurance firms, I think it’s a huge part of the strategic debate.”


He stated that Fitch is taking this into account in its rating review.”What are they doing in some of the important business lines that are affected?” Are they recognizing or instituting new rate increases? “Will they be able to get those through regulators?” he wondered. “A huge part of our study now is just trying to understand strategically what firms are doing and how effectively they could be executing.” It’s still early days in certain industries and for some firms, but that’s the approach we’re pursuing. We know that it is a danger that many organizations have not encountered before, at least not in the lifetimes of their employees.”

Indeed, Buckley stated that one of the major issues with the present inflationary climate is that data and history from earlier inflationary eras exist, but few people, particularly those in decision-making positions, have lived through them.

“I believe that’s a big issue,” he says, “because it implies people are discovering it for the first time.”

A One-of-a-Kind Environment
However, what distinguishes this present inflationary phase is the presence of numerous other variables exerting pressure on the economy, according to Buckley. In addition to the epidemic and the resulting supply chain issues, shifting weather patterns are compounding matters.

“I believe the one difficulty with climate change is that it’s a long, gradual event, so insurers don’t think about or price out to 30 years from now; they think throughout the life of insurance, which is often considerably shorter,” he explained.

With this in mind, insurers will need to assess what solutions can be implemented now to ensure they are prepared as the climatic situation progresses, while being flexible to changes in weather patterns, according to Buckley.

“When I think of climate change in relation to the general inflationary pressures we’ve been discussing, I would suggest that over the next three to five years… definitely the general inflationary pressures will be the more prominent and the one firms will be focused on the hardest,” Buckley said. “However, climate change concerns and how they grow… that’s going to be an additional complexity [insurers] have to deal with and consider in as they attempt to deal with this one very difficult issue.”

He stated that all of this indicates that there is a lot of uncertainty right now.

“Because there are so many moving components, there is still a lot of doubt as to how this will play out in people’s crystal balls,” he added. “So I believe one of the most unusual issues we’re having today is figuring out what your inflation assumption is, how long it will persist, how it will play out, what kind of stress circumstances do you see, and how much you put them into pricing and things like that.” I believe it is a particular difficulty that businesses are experiencing now due to various factors that are either driving or supplementary to inflation.”

Buckley sees inflation spreading into most fields of business as he stares into his own crystal ball.

“Right now, firms are grappling with inflation affecting items like car and property lines, where inflation very much affects a product whose costs will push up claim expenses,” he explained. “If general inflation persists for a couple of years, it will begin to seep into all items… So, this will eventually creep into every line of business, but it will come at different times and at different rates, which will be an extra difficulty for actuaries if they get to that point and have to figure out how to price it today.”

Buckley feels that, apart from contemplating pricing and being proactive and flexible for the future, the most essential thing for businesses to do is understand that inflation is a legitimate threat that is not going away anytime soon.

“If you look back six, seven, eight months, there was definitely a school of economists that believed inflation would be transient and go away and not cause concern,” he continued. “I believe that very few people are in that camp presently, but given that there was a large school of thinking not long ago, it poses a dilemma and forces us to examine implementation.”

In this sort of climate, the first step in execution is to say, “Okay, we’re going to buckle down, assume it’s occurring, have certain assumptions that make sense, and have contingency plans in place while we think about repricing.”


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