According to the Swiss Re Institute, headline inflation is estimated to decline but stay elevated in 2023, to some extent alleviating upward pressure on claims compared to 2022. However, cost inflation in certain prices, such as labour and healthcare, may remain high. These, and non-economic factors like social inflation and more frequent traffic accidents, will likely underpin still-elevated claims, notably in motor and liability. This environment will require P&C insurers to consider continuing underwriting discipline in 2023.
- We estimate that high inflation alone led to an increase in P&C claims of 5-7.5% in 2022, close to rate rises, but the change in price is not enough to counter the upward pressures from other non-economic factors, in our view.
- We believe inflation has peaked but is likely to remain more persistent in 2023.
- Ongoing elevated prices in certain areas are expected to pressure lines of business in casualty and liability.
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. We estimate that inflation alone increased/will increase P&C claims costs by 5-7.5% across main five markets in 2022 and 2023 (see Figure 1). And for property, a short-tail business immediately sensitive to inflation impacts and rising construction costs, we estimate a 6-13% increase over the two years, higher than the 5-8% range of registered price increases.
We expect P&C claims growth to ease in 2023 alongside moderation in inflation. Coupled with a repricing in loss-making areas during recent primary market renewals, this may alleviate some of last year’s underwriting pressure. Still, insurers will need to maintain discipline in pricing, and terms and conditions, as we forecast inflation to continue to impact many claims-relevant price categories, such as labour and medical costs. Prices in these areas typically grow more slowly than in other segments, and they remain elevated.
Non-economic factors, such as social inflation and increased loss frequency in motor and property lines, reaffirm that further rate hardening is required to narrow the estimate that all else equal, premium income needed to have risen 13% to offset inflation-driven claims gains in 2022. Property premium income fell short of rising claims costs in Australia, Germany and the UK.
We estimate that the average combined ratio in P&C insurance in our profitability analysis of eight major markets 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 US, the motor physical damage loss ratio reached 84% in 9M22, almost 20 ppt above the annual average of the 10 years before the COVID-19 pandemic.
For 2023, we forecast a P&C combined ratio of around 98%, close to the pre-COVID-19 2019 level of 97.7%. 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. For example, we forecast the producer price index for construction (PPI-C) in the UK to rise by 8% this year, and in the US by 11.4% (see Figure 2). Cost rises in motor vehicle repairs and replacements should ease in key markets (except France, where price increases in inputs such as energy lag other markets), but will still be above pre-pandemic levels. Regarding other inflation drivers, we expect tight labour markets to increase wages (eg, we forecast that wages in the UK will rise by 6.2% this year, more than our 5.5% projection for core CPI) and backlogs of medical procedures to increase healthcare costs, putting pressure on long-tail lines of business in casualty and motor liability.
Signals for a market correction had been mounting long before the inflation-driven rise in claims 2022. The underlying claims drivers indicate that higher primary insurance rates are likely. Sustained insurance underwriting discipline will be needed in 2023 to help improve underwriting results.