Inflation observation: how and why insurers should up their monitoring game
Long-term inflation is a headache for the insurance industry, but Reto Koller (pictured), chief executive officer of Active Reinsurance at Helvetia, says there are things you can do to keep a lid on its worst impacts.
Koller admits there were no easy answers but he does advocate certain approaches in an exclusive interview ahead of speaking at the Intelligent Insurer’s Re/insurance Outlook Europe event, June 19–20, in Zurich.
“You can start by projecting what that inflation rate will be going forward and you can use that and adjust for new information that comes up in your pricing,” Koller says.
“You can become more selective in the risk selection part—for example, ask yourself: ‘Who do I believe is doing a good job in underwriting and claims-handling in particular?’.”
Koller emphasises that Helvetia Active Reinsurance is not directly involved in claims-handling so the reinsurer relies on its clients and cedants to deal with that side.
“We look into areas or entities where we feel very comfortable that they are doing a good job.”
He says it was important to make the distinction between regular inflation, which pushes up costs in the short-term lines such as motor and property, and social inflation, which refers to the rise in the amounts of money that courts award and the increase in the number of legal disputes.
Referring to social inflation specifically, he says that analysis of the legal situation in different places is important. “You’re looking for the legal framework in certain jurisdictions and asking yourself: ‘Should I write less business in certain parts because I just don’t believe that the respective legal system is handling these cases appropriately’.”
This kind of analysis would then lead to thinking about limiting certain risks in your contract, he adds.
“You put in exclusions for certain risk elements and limit your exposure there as well, so rather than maybe giving out 50 million per policy, you give out only 25 million or less. With that you manage your maximum downside as well.”
Koller says that engagement with industry experts and regulators is crucial to ensuring that they are all aware that the legal system may need recalibrating. He points to the US state of Florida as a relevant example.
“Florida has initiated a tort reform because the regular people start to realise that how it is working right now has nothing to do with the original intention of an insurance policy or a loss payment,” he says.
“If financial investors are getting the bulk part of an insurance settlement, that doesn't look right. It should go to the people who were impacted by an event and lost something. But at the moment, it’s going the wrong way. So, People have started to realise that and there are initiatives taking place in the US and in other jurisdictions to address that.”
For more on the impact of inflation for re/insurers, you can see Reto Koller, CEO of Active Reinsurance, Helvetia Swiss Insurance Company, speak live in a panel session titled ‘Increase oversight and monitoring of the long-term impact of inflation on casualty claims’ at the Intelligent Insurer Re/insurance Outlook Europe event, June 19–20 in Zurich.
