Effects of inflation on the insurance Industry.

What is inflation?

According to the IMF, inflation is the rate at which prices of goods and services rise over a period of time. But, more accurately, inflation is a decrease in the value of money so that it requires more money to purchase the same thing.

After a consistently low inflation rate over the years 2020-2022 saw a 7.1 percent inflation rate that is still going up. As the cost of commodities and services keep going up in most industries, the insurance industry is not exempted. These are some of the effects inflation has both on the insurer and insured:

Increased cost claims payout

The risk of claim to be paid out is going to cost more than the insurers had planned for. Insurance is built on the concept that insurance companies will collect enough premium and spread risks across policyholders that they will have no trouble paying out claims. With inflation, the claims payout will go higher than expected, leading to insurance companies incurring huge losses.

Increase in premiums

As the prices for goods and services go up and so does the cost of premiums. The cost of cars, labour, health care and property is becoming more expensive, affecting the premiums that each policyholder is expected to pay. Inflation erodes the buying power of money, which means that your premium payments may not go as far as they used to.

Increased commissions for agents and brokers

Increase in premiums means insurance intermediaries will earn more in commissions for each policy they sell. This is necessary to ensure solvency not to make profits. Insurance intermediaries will continue bringing in more money with those higher premiums, and they will continue earning larger commissions, while the costs of claims will hopefully go down as inflation eases up.

High profits due to increased interest rates.

Insurance companies are investment companies. The current increase in inflation rate increases interest rates impacting life insurance companies in a positive way. Life insurance company will generate more investment income and that can improve profitability and potentially support lower premiums.

For insurers and the insured to protect themselves against inflation, policyholders should ask their underwriters for an inflation protection cover for their policies to protect themselves against high premiums that come with inflation. Insurance companies should also develop an investment solution that will help to protect the value of a portfolio during periods of accelerating price inflation.