Crystal ball gazing: inflation, renewals challenges not going away in 2023

Cost pressures will continue to strain the industry next year, as insurers grapple with fallout from ongoing supply chain issues and record-breaking flood catastrophes in the eastern states since February, analysts say in a preview of what to expect over the next 12 months.

Law firm Clyde & Co says persistently high prices will have knock-on effects industry-wide including on natural catastrophe reinsurance capacity and professional indemnity (PI) insurance.

Consultancy EY also expects inflation to remain a key challenge. However, it says the Australian industry remains “structurally attractive” despite volatility in recent times.

“In many lines of business, the resurgence of underwriting margins from strong rate increases in recent quarters bodes well for industry performance in 2023 and over the next [few] years, but claims inflation will adversely impact margins for some time,” EY Oceania Insurance Leader Walter Poetscher said.

“We expect further rate increases necessary in home insurance on the back of higher catastrophe losses and post-event inflation, while motor insurance will likely revert back to normalised levels after Covid-19 tailwinds end and average claims size increase.”

Clyde & Co says this January renewal season will be a tough one as reinsurers continue to weigh the impact of the high-cost environment.

The law firm has predicted a “sharp reduction” in available natural catastrophe reinsurance capacity ahead of the renewals talks.

“Inflation will make 1/1 reinsurance renewals challenging,” the law firm says in its Insights reports, pointing out the topic dominated European reinsurers’ minds at the widely watched Baden-Baden meeting in October.

“The impact of inflation on the cost of doing business means insured losses will be more costly across all lines of business, leading to an inevitable increase in deductibles on renewing coverage.

“From the reinsurers’ perspective, these will mean a reduction in the amount of more profitable first-layer business that they can write, skewing the balance of portfolios towards more volatile, large-loss coverage.”

Australian insurers, among the biggest buyers of reinsurance programs to protect against natural catastrophe exposures, have been bracing for possibly significant higher rates at this coming renewal talks after record floods this year.

Clyde & Co says the influence of climate change on natural catastrophe losses is causing reinsurers to re-think their approach.

“With practically no alternative capital available for these risks currently, there is likely to be a sharp reduction in available nat-cat reinsurance capacity at upcoming renewals, and this development is likely to extend well into next year,” the law firm says.

Clyde & Co predicts PI is another area where the effects of inflation will be felt, especially for construction and engineering professionals.

“Inflation of prices for raw materials such as timber and steel, which began during the worst of the Covid-19 pandemic, has been exacerbated by the [Russia-Ukraine] war,” the law firm says.

“And the global macroeconomic climate – particularly rising interest rates – coupled with labour shortages, will also result in construction and engineering professionals feeling the squeeze.”

PI market conditions may change, having eased considerably since the Lacrosse apartment fire in Melbourne in 2014 and Grenfell fire in 2016, the result of insurers retreating to cut back on losses.

“Periods of economic distress… typically see an increase in professional indemnity claims, and we may well see claims rise significantly as macroeconomic conditions bite,” Clyde & Co says.

The London PI market – a key source of capacity for the Australian market – will likely see rates continue to harden over the course of next year but at a slower pace.

“There will be an increase in both the frequency and severity of claims in the coming two years as economic conditions start to affect the professions and both cost and wage inflation have a material impact on the volume of claims made,” Clyde & Co says.

“While claims will almost certainly increase over the coming year, insurers will maintain their appetites for London market PI, giving professionals some peace of mind for the potentially turbulent months ahead.”

Click here for the reports.