As we approach year-end 2023, a complex market outlook and volatile external environment make this year-end’s financial close planning and results expectation management more difficult than usual.

Whereas insurers have seen rates continue to strengthen over the last number of years, this trend is now very mature, and in areas rate increases are decelerating and even turning downwards for some lines. The combination of a changing market context for insurance rating and a complex economic and operating environment with continued inflation and political and social upheaval, means that results from current and prior years have many moving parts requiring additional attention and explanation.

An environment of increasing Global Instability

Instability in the global economic, political and social environment continues to prevail.

2023 has witnessed significant uncertainty in financial markets. In the banking sector we have witnessed bank collapses in both the US and EU, and the second order impacts of such volatility require careful consideration by insurers. In addition, the continued Russia-Ukraine war and more recently upheaval in the Middle East have direct impacts on a number of insurers’ classes of business, adding to the uncertain environment in which results are being determined.

As we’ve emerged from the Covid-19 pandemic, re-underwriting, large rate changes and inflationary trends are making it more difficult for companies to reliably determine underlying profitability levels for the current year. Such an environment also increases uncertainty surrounding companies’ prior year estimates, as for example reserving assumptions based on historical data are potentially invalidated.

Economic Inflation – How high, for how long and what about prior allowances?

These are some of the questions we’ve seen companies and their Reserving teams grappling with as we approach year-end.

While an environment of high economic inflation is consistent with last year, reserving considerations are different, particularly as companies decide on the extent to which they should unwind prior inflation loads. One year on, many inflation models will be recalibrated, with insurers considering the extent to which inflationary impacts are now implicit in their claims data. Different claim types are impacted by different types of inflation. For example there are very evident and observable experiences from price inflation in short-tailed property lines, with businesses with rebuild and repair needs being subject to increased costs. What is not as obvious or observable are the consequences of inflation in liability settlements, which are impacted by both cost and social inflation considerations. These challenges are further exacerbated by changes to settlement patterns and the lagging impact of inflation on longer term claims. There is considerable judgement required to appropriately reflect future expected settlements.

Social Inflation (US & Europe)

Insurers writing US Liability lines are likely considering the extent to which they may be impacted by social inflation. While impacted insurers will have likely made allowances for social inflation impacts for some time now, the emergence of litigation funding has created additional uncertainty. Litigation funding is having a major impact on nuclear verdicts, social inflation and claims costs in general, with insurance results highly sensitive to estimates of the level and future growth of litigation funding.

In Europe there are also emerging concerns around social inflation, with its own specific characteristics as well as more commonly recognised characteristics such as the emergence of Class Actions.

Changes in the Underwriting Environment

During the 2019-2021 period, many Underwriters undertook significant book remediations, with a consequential impact that segments such as International Specialty and Reinsurance experienced significant rate hardening and terms & conditions tightening.

These remediation efforts have resulted in positive underwriting returns for many market participants, the key question being how long will the rating discipline and hard market conditions persist? From our market interactions we note that some business plans are projecting forward a continuation of this rate and claims environment over the coming years. This may be an optimistic assumption and we would suggest caution is exercised noting the observable uncertainty. Insurers will need to keep in mind the uncertainty surrounding long-term rate trends, considering the risk of overestimating benefits associated with market hardening on recent years.

Trust the process

Insurance companies are designed to manage and take on risks as such this uncertainty is the stock in trade of Insurance Companies. In this context it is not a case of doing anything particularly new, but ensuring that there is sufficient attention and focus in the application of existing results production and reporting processes, as supported by internal control and governance frameworks.

Conclusion

Insurance is a mature and professional industry responding to the challenges of society through the provision of risk mitigation and protection. It is in times like this that the industry shows its value to policyholders and also tests the confidence of its Management and Shareholders. Navigating uncertainty and delivering appropriate risk adjusted returns to Shareholders is how industry leaders grow and thrive over time, and this year will provide an opportunity to demonstrate that capability.