Claims inflation

A major concern for the insurance market is the increase in inflation experienced since 2021. The issue has also been the focus of supervisors’ attention, with EIOPA, for example, issuing a supervisory statement in 2022¹ and recently publishing a report on the impact of inflation on the insurance sector.²

Claims inflation – the increase on cost of claims over time – is among the most significant impacts of inflation in insurance. While inflation can clearly affect both life and non-life insurance business, life insurers with mainly fixed nominal benefit payments to policyholders are less exposed to claims inflation than non-life insurers. As for technical provisions, such as claims reserves, long-term, non-life obligations are generally the most exposed to inflation risk, and claims inflation may result in under-reserving due to the increase on prices and expenses incurred when meeting insurance obligations.

Considering that inflation has been low in most EU Member States over the past few decades, methodologies that do not explicitly adjust inflation have often been used. Since higher inflation is persisting, as EIOPA also noted, more granular considerations may be relevant to ensure an adequate level of technical provisions, including breakdown of the types of costs, line of business and geographical considerations.

In line with Articles 29 and 30 of Commission Delegated Regulation (EU) 2015/3512 (requiring undertakings to take into account expected future developments in the external environment and all uncertainties in the cash flows), insurance companies should properly consider inflation based on the nature, type and complexity of the risks, so the level of technical provisions is adequate.

The need to consider whether claim cost expectations in the technical provisions are still realistic in the current market circumstances exists. Overly optimistic inflation assumptions might lead to under-reserving in a scenario of slower disinflation.

In reviewing the adequacy of technical provisions, insurers should also consider what is sometimes referred to as “social” inflation, which may lead to an increase in claims costs due to factors beyond general economic inflation. Factors can include the rising costs of claims due to possible more claimant-friendly court approaches, increasing litigation costs, longer times in settling the claim. This is particularly relevant to directors and officers insurance, professional liability and product liability insurance.

It is sensible for insurers to continue reviewing whether current reserves are appropriate, or if they need to be revised, especially where reserves have been set years before and the claim has not been settled, ensuring technical provisions are based on up-to-date information and realistic assumptions.

¹EIOPA, Supervisory Statement on inflation, December 19, 2022.
²EIOPA, Report on the impact of inflation on the insurance sector, October 5, 2023.