Swiss Re has warned that insurance and reinsurance firms will face increased indemnity costs after land-falling hurricanes in the United States this year, as inflationary factors are set to drive claims amounts higher.
In summarising what to expect from the 2021 Atlantic hurricane season, according to the forecasts, Swiss Re also touches on what is a key issue for the industry this year.
Inflation is driving prices higher and while the insurance and reinsurance industry may have been hoping that claims inflation from litigious claims could be close to reducing, thanks to legislative efforts in Florida, there are other inflationary factors that are a cause for concern.
Overall, economic conditions are increasingly tipping towards inflation, as a side-effect of the pandemic and related financing.
“Economic factors such as inflation also affect hurricane risk assessment for the insurance industry. US inflation is rising, fed by the economic recovery and consumer spending as well as fiscal stimulus from the crisis,” Swiss Re explained.
Chief among the inflationary factors being seen that will affect the hurricane season for the insurance and reinsurance industry are prices of materials and costs in thee construction industry.
Swiss Re said that, “Construction prices in particular are surging due to a booming housing market.”
We covered this exact topic in a recent Artemis Live video interview, where we discussed how inflation could be a driver of higher costs this hurricane season, as well as for other major catastrophe or property claims events.
Swiss Re believes that the industry faces the prospect of elevated industry losses from hurricanes this year, because of the inflationary factors impacting prices and in particular those related to repairs of properties.
Inflation “Is likely to sharply increase claims costs from any loss-making landfalls this season,” Swiss Re warns, which the reinsurer notes, “Would significantly negatively affect indemnity costs for any re/insurer.”
Inflation is on everyone’s mind across insurance and reinsurance right now, with an expectation that the investment side of the business may feel some effects as inflation is increasingly baked into economic forecasts.
But the immediate threat of much higher claims costs, driving higher indemnity for re/insurers, after a significant catastrophe event, such as a hurricane, could be a more immediate threat and even one which has the potential to drive a mismatch of actual indemnity from a hurricane, compared to previously modelled expectations.
This is also important for the insurance-linked securities (ILS) market, as indemnity losses qualifying under reinsurance layers, or instruments such as catastrophe bonds, could mount quicker than anticipated due to thee inflationary factors, while there is also potential for them to creep for longer as well, given the impact to availability of construction teams and labour of the active housing market in the United States.