According to Swiss Re, rising claims inflation, compounded by reinsurance capacity demand-supply mismatch in a rising interest rate environment, could contribute to an increase in the cost of providing insurance capacity in 2023 and beyond.
The prediction was made in the firm’s two-page Economic Insights report, which was released this week.
“This year’s US dollar strength, along with high inflation and rising interest rates, have exposed pockets of financial vulnerability,” Swiss Re wrote in a nutshell summary of the global economy.
“Yet markets now expect imminent peaks in inflation and pauses in interest rate increases, driving a US dollar reversal. It is too soon to discount both market risks and the lag effects on claims inflation, which will likely keep re/insurance rates rising.”
The financial giant attributed the US currency’s strength to the Biden administration’s tightening of policy in order to combat inflation.
It stated that interest rates in the United States had risen at the fastest rate in decades and that, despite the risks of a recession next year, it did not expect the Federal Reserve to cut rates.
It said that in a world where the dollar is dominant in global trade and financial strength, US policy has spillover effects.
“Moreover, this episode of USD strength coexisted with elevated commodity prices, presenting a double hit of imported inflation,” it wrote. Finally, for many countries, currency depreciation will have an immediate negative trade impact because imports will become more expensive.”
It concluded: “Sticky prices do eventually become unstuck, but adjustment lags matter more when inflation is high, as the gap between current and old prices is higher with time. Many of the drivers of non-life claims inflation (such as producer or pipeline prices for construction, healthcare, and motor) continue to exceed headline CPI inflation (eg, due to raw material shortages and USD appreciation).”
“Compounded by the demand-supply mismatch of reinsurance capacity in a rising interest rate environment,6 rising claims inflation could still contribute to an increase in the cost of providing insurance.”