Persistent High Inflation Could Weaken Reinsurers' Credit Profiles

Current high levels of inflation occurring as the world emerges from the COVID-19 pandemic could weaken reinsurance companies' credit profiles if they persist, according to a recent report from Fitch Ratings.

The most affected reinsurance businesses include long-tail lines such as general liability, medical malpractice, and workers compensation and excess-of-loss reinsurance treaties with fixed deductibles, Fitch said.

The rating agency noted that consumer price inflation across Europe and the United States—the two most important regions for reinsurers—has accelerated since the second quarter of 2021 due to a strong economic rebound, loose monetary policy, and supply chain disruptions.

Fitch said it expects inflation to be short-lived, but if it significantly exceeds its expectations over the next 2 years or longer, reinsurance companies could face margin pressures on short-tail lines and reserve deficiencies in long-tail lines of business.

Increasing consumer price inflation is leading to higher claims inflation in reinsurers' short-tail business lines due to rising repair costs for buildings and vehicles, Fitch said. "Reinsurance prices are increasing accordingly but may struggle to keep pace if high claims inflation persists, particularly if pricing again becomes as competitive as it was in recent years," a Fitch statement said.

Fitch said that a short period of high inflation shouldn't materially affect reserve adequacy for long-tail reinsurance business lines such as auto liability, workers compensation, or directors and officers insurance. "The reserves are long-term, and we believe they already allow for a relatively high level of future claims inflation," Fitch said.

Persistent high rates of inflation—or expectations by reinsurers that inflation is likely to persist—could lead to reserve deficiencies on some long-tail reinsurance lines, however, the rating agency said. The profitability of workers compensation insurance could be particularly affected if medical costs increase significantly, given that workers compensation premiums have been flat or declining recently.