Having warned previously that inflationary factors will result in elevated property insurance claims, global reinsurance firm Swiss Re has now qualified this by saying that the inflationary effect of higher materials and construction prices may only last through this year.
As we reported recently, Swiss Re had said that insurance and reinsurance firms will face increased indemnity costs after land-falling hurricanes in the United States in 2021, as inflationary factors are set to drive claims amounts higher.
The main inflationary factor expected to affect the hurricane season for the insurance and reinsurance industry this year is inflated pricing of materials and costs in the construction industry, Swiss Re had said.
Now, in an economic update report, the reinsurance firm notes that this gain in pricing is expected to be temporary.
Swiss Re again confirms that the 10.2% increase in US home construction prices that has been seen will increase claims severity, but only in the short term the company believes.
“Homeowners and commercial property claims severity is set to rise on the back of the current supply- demand imbalance, which is triggering price rises in building materials and also a shortage of labour in the construction sector,” the company said.
But, encouragingly, Swiss Re does not believe this effect will be a lasting spike in construction costs, with demand expected to return to more normal levels and so inflation reduce.
“We expect that the surge in construction-related prices will be temporary and will fade again in 2022,” the reinsurance firm said.
However, the company does expect inflationary factors to persist, as it notes that, “A 40-year-old American has never previously experienced an annual rate of core inflation above 3%, until April this year.”
Because of the effects of the pandemic and other demand and supply-side factors, Swiss Re warns that, “We have increased our US inflation forecasts for 2021 and 2022 to 3.7% and 2.3%, respectively, and see continued risks to the upside.”
So, while the spike in construction costs is expected to abate, the steady inflation of prices everywhere may persist, which will also have a knock-on effect on claims severity and so increase claims costs more quickly than has been seen for years.
This has a read-across for the insurance-linked securities (ILS) market, as indemnity losses qualifying under reinsurance layers, or instruments such as catastrophe bonds, could mount faster than expected due to inflation of claims amounts.
Inflation also creates the conditions that could see claims creeping for longer as well, given the impact to availability of construction teams and labour in the very active housing market in the United States.