Inflation volatility cited as significant planning concern for insurers

Inflation and inflation volatility should be significant concerns for property casualty insurers in the coming years, according to a recent study.

"While the insurance industry has dealt with inflation and associated volatility in the past, there has been little inflationary impact in the past 15 years," said Stephan Christiansen, director of research at Conning Research & Consulting. "As we look ahead, there appears to be increased prospects for inflation in components that could have significant impacts on insurer operating results and economic value, both good and bad."

In the report -- Inflation in Property-Casualty Insurance: How Bad Can It Be? -- Conning researchers reviewed the history of inflation and its components in the U.S., its impact on the property casualty industry, and potential mitigation strategies for negative impacts. The study also analyzed the likelihood of inflation in the 2010-12 industry forecast period.

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"In our study we looked at historical industry results, and then modeled the personal auto and workers' compensation lines of business in order to better analyze inflation impacts from both steady and volatile increases," Christiansen said. "In some early stage inflation scenarios, operating results actually improve, but longer term we see dramatic value destruction from hyper-competitive pricing and loss reserve development. Insurers have a number of tools at their disposal to mitigate inflation risk but must be prepared to respond quickly, particularly in the case of a volatile inflation event."

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March 11, 2010

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