Inflation will drive insurance prices higher for “a couple of years at least”, Patrick Gallagher, chief executive, Gallagher, has said.
Gallagher told the Financial Times that underwriters were acting “professionally and astutely” by increasing prices in response to inflation in the cost of claims.
Rising inflation has given new momentum to a years-long rally in insurance and reinsurance prices, as insurers react to increases in the cost of rebuilding homes and repairing cars by raising the cost of cover.
This so-called “hard market” of rising prices would continue until the surge in inflation is fully absorbed into current profits and priced into new business, Gallagher predicted: “That will take a while . . . a couple of years, at least.”
Insurance brokers secure insurance for their clients, taking a fee or commission in the process. Gallagher, which has a market value of $45bn and employs more than 40,000 people worldwide, leap frogged Willis Towers Watson last year to become the third biggest broker by market capitalization, after acquiring most of the latter’s reinsurance broking business.
Rising inflation has had a big impact on insurers’ margins, triggering profit warnings in some lines of business. Across the board, US property & casualty insurers had a $27bn net underwriting loss last year, their worst performance since 2011.
To try to restore margins, insurers have increased the cost of cover, putting pressure on cash-strapped companies and households recovering from the pandemic. UK legislators pressed senior insurance executives earlier this month about big price rises, while consumer groups have raised concerns about the added cost-of-living pressures.
The property insurance market, particularly in the US, “continues to be difficult”, Gallagher said. Big insurers such as State Farm and Allstate said recently they had suspended offering home insurance to new customers in California. State Farm cited “historic increases in construction costs . . . rapidly growing catastrophe exposure, and a challenging reinsurance market”.
Gallagher, whose grandfather founded the business in 1927, pointed to the rules of doing business in many US states such as California, where insurers have to get sign-off from the regulator for their insurance rates.
“It isn’t all just dollars and cents,” Gallagher said. “You’ve got to go ask for [approval on] rates. If the politics aren’t there, we’re back to the economics. Is it uninsurable? I don’t think so. It’s been insured a long time.”
A combination of the regulatory challenges and rising exposure was behind the insurers’ exits, he said. He called on other states to follow the example of Miami, which has brought forward legislation that can keep down rising legal costs for insurers.
“And of course climate change plays a role,” he added. “Of course fires are worse than they were — some of those terrible fires that have happened in California, that’s climate change.”