How is the cost-of-living crisis impacting insurance?
With eye-watering levels of inflation and increasing interest rates triggering a global cost of living crisis, consumers and businesses are tightening their belts. How is the insurance industry coping?
According to the Office for National Statistics (ONS), the Consumer Price Index (CPI) in the UK, including owner occupiers’ housing costs (CPIH), rose by 8.8% in the 12 months to September 2022, up from 8.6% in August.
In the UK, the CPI index currently stands at 11.1%, the highest rate in 40 years. In the US, figures suggest it stands at 8.5%. According to Moody’s Analytics’ figures, global inflation hit a peak of 12.1% year-on-year in October.
This is an epidemic impacting consumers and businesses alike. The climbing cost of consumer goods and energy, coupled with wages that are not keeping up with inflation, is causing a mass global cost of living crisis.
Given the pressure on household budgets and the costs of running a business in this climate, how is this impacting the insurance industry?
TransUnion recently revealed in its “Personal Lines Insurance Trends and Perspectives Quarterly Report”, which examined trends in the markets from April 2021 to October 2022, that inflation is indeed putting the squeeze on insurers in multiple directions.
According to Jos Cobben, VP sales EMEA/LatAm and digital underwriting at InsurTech dacadoo, the jury is still out on what the exact impact on the insurance industry as a whole, given the crisis is very much still ongoing.
Thus far however, it is reasonable to assume that households will revaluate their expenditures and set new priorities. This may include Netflix subscriptions or gym memberships, as well as insurance policies.
Cobben said that as yet, the life and health insurance industry has not seen a decrease in policies or customers. “Insurers do expect however that after a prolonged period of increased costs, policyholders will increasingly lapse their policies. And this is more likely to occur to savings products (despite sometimes heavy surrender penalties) than to pure protection products.”
We may see a similar pattern that the industry witnesses when a consumer starts to earn more and increase their wealth, but in reverse. Cobben said that typically, consumers start to buy medical insurance cover when they can afford it, then funeral cover, life cover, then disability cover and finally when there is any money left, they save for retirement. “One can now assume that with reduced budgets, the reverse order will kick in.”
On the flip side, instead of the squeeze on consumer finances causing certain insurance policies to be de-prioritised, a climate of uncertainty could encourage consumers to protect themselves more diligently.
Cobben said the Covid-19 pandemic reinforced the value of protection products, and given the pandemic “is not 100% over,” consumers may hold on to certain protection products, but hunt for cheaper products.
The other direction that the force of inflation may take, Cobben added, is the need to keep protection at the same real value leading to an increase in nominal value insurance products.
Héléna Denis, head of corporate development at InsurTech Akur8, said insurers are no stranger to profitability challenges.
“Insurers have faced profitability challenges for years, strengthened by the Covid-19 pandemic, and more recently by the sudden spike in inflation,” she said. Denis pointed to a recent McKinsey estimate which showed that rising prices, especially affecting the goods and services that drive personal insurance claims, contributed to an approximately $30bn increase in loss costs in 2021, over and above historical trends. This dynamic inflation setting is a critical challenge for pricing actuaries.
Firstly, Denis said it caused insurance premiums to increase. There are two forces going on in the background of this. In periods of uncertainty, some insurers scale back their services, thereby reducing the offering in the market, driving premiums upwards. Consequently, and also due to the cost-of-living increase, consumers may cope by reducing their coverage, generating an environment of overall underinsurance.
Secondly, Denis said inflation also causes claims costs to increase, due to the rising cost of materials and labour, deteriorating insurers’ books. Also, “as inflation pushes up the costs of goods, some risks go up as well, for example cyber risk,” she said.
dacadoo’s Cobben agreed that insurers will feel the cost pressure themselves as well and will need to continue to look for ways to keep expenses under control.
“Many of them have invested in real estate and with rent increasing, one can again expect a two-pronged reaction. Firstly, businesses will decide to reduce cost by reducing the square metres they rent, while at the same time, the increases in rent will lead to higher revenue; the resulting outcome of these two antagonistic forces being undecided,” Cobben said.
In addition, insurers have also been impacted by low or negative interest rates. However, according to Cobben, this does not automatically translate into “loud cheering” now that interest rates are on the rise. “Fixed income assets will reduce in value, as will liabilities in real economic value terms, the net result depending on duration of both sides of the balance sheet,” he said.
Overall, Cobben said rising interest rates mean a return to more normality for insurers with long term liabilities, which in turn also should have a downward pressure on prices of insurance cover. “Insurers in general have been able to weather the low interest rate storm quite well.”
What should insurers be doing in this climate?
According to Denis, in this context, risk control is more vital than ever and therefore pricing is an increasingly pressing concern.
“Overall, the current macroeconomic context strengthens the need for assertive premium and pricing strategies, and therefore the need for powerful, flexible and intelligent pricing tools, as part of a coordinated response across pricing, underwriting, claims and other functions,” she said.
For dacadoo’s Cobben, insurers will continue to feel increasing price pressure from competitors, and hence will need to find other ways to “wow” their customers beyond simply reducing the price.
“They understand that high-cost loadings for distribution or administration are not sustainable, so while they feel the duty to offer affordable products to consumers, it is their fight for survival too,” he said.
However, Cobben is optimistic that the industry will weather the storm. “Insurers are long term investors so need to be prepared for economic hiccups during their lifetime. History, helped with interventions by regulators, have shown that the industry with very few exceptions has shown to be resilient.”
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