In his second article, Russell Group managing director Suki Basi explores the impact of rising inflation on the (re)insurance market…

Inflation disasters

Following yesterday’s article on the causes of inflation, today I examine the impact of rising inflation on the (re)insurance market, which comes at a difficult moment for the industry. 

Post-Covid, the industry is in a hard market, whereby competition is severely reduced due to the withdrawal of many insurers, forcing premiums up and leading to stricter underwriting criteria for assessing risk.  

A prime example of this is in the space and cyber sectors, which have seen both a reduction in capacity and a rise in stricter underwriting questionnaires for potential policyholders. This environment is not particularly welcoming for policyholders, as they will struggle to gain substantial levels of cover at a reasonable price.  

Coupled with the fears of looming inflation is another issue that is a direct consequence of this: underinsurance. With prices rising across the board, many policyholders may simply not renew or opt for insurance coverage, which is worrying many insurers with the renewal season upon us.   

With the economic landscape looking uncertain, it is expected that rates will have to rise at a time when many (re)insurers and brokers will be entering into renewals.  

Policyholders in some segments, such as property, are seeing insurance premiums increase by 10-12 percent as a result of index-linking, as the premium rate is tied to the rate of inflation.   

Furthermore, when you add into the mix current hard market conditions, these index rises will be accompanied by further rate increases. So, given the lack of capacity in certain classes of business, many policyholders will have little choice but to accept the higher rate or self-finance their risks.  

Rising costs 

Increased costs for items such as raw materials have led many to remark that inflation is creating an insurance gap, as a property’s original insured value could be less than the actual value required in the event of a claim.  

For example, based on a 25 percent rise in rebuilding costs, if a property were insured for, say, £1mn and required rebuilding entirely, this would now cost £1.25mn, meaning that policyholders must either finance the £250,000 difference or pay for more coverage. 

Fears of underinsurance 

With prices expected to continue rising, many firms may simply believe that insurance is a luxury and are prepared to take a view – a potentially disastrous one at that – that they need to curb upfront costs.  

However, it is not just sectors such as property that are potentially becoming underinsured.  

In August of this year, broker Lockton said in a report that firms in the hospitality sector must closely examine building reinstatement values to avoid being underinsured. The report warned that firms in the sector are at risk if current insured values are not adjusted appropriately to account for the sharp rise in inflation.  

In my final article, I will outline how by working together corporates and (re)insurers can successfully navigate a path through this difficult time.

Suki Basi is managing director at Russell Group