Report: The effects of inflation on insurance companies: Moody's has drawn-up a report detailing several scenarios that may very well accompany the prolonged rise in consumer prices denting profits and causing ill side-effects.

• Position: B. MUSTO [REPORT]

Besides the glitches in global supply chains, the post-pandemic world has been facing a surge in energy prices following the resumption of economic activities. Such a situation has been compounded by the geopolitical scenarios triggered by the war between Russia and Ukraine, which is fuelling inflationary pressure worldwide. Moody's has produced an analysis detailing how the current situation may impact insurance companies within EMEA. US insurers would do well to take heed. The rating agency has remained neutral on the creditworthiness of the insurance companies operating in the Mediterranean and in the Middle East, and believes that, although inflation may increase damage claims, the insurance sector will be fully able to offset such a trend, by increasing premiums and benefiting from improved investment yields such as an increase in interest rates.

A HIKE IN PRICES

In its report, Moody's "considers a downward scenario of a high and prolonged inflation" as the main risk for insurance companies. "Such an event would increase credits more than usual, that would require prices to be raised. The insurance sector may not be able to sustain such pressure and profits may be curtailed". Stubbornly high inflation might also slowdown economic growth and consequently the demand for insurance policies. According to Moody's, if this leads to significant growth in the interest rates and a high market volatility, insurance companies may also experience a dent in capital and profit.

Within the main scenario Moody's has envisioned, "non-life insurers would be able to offset the majority of the increases in accident-related expenditures by increasing prices and limiting the decline in their insurance-related performance". At the same time, the report states that "the increase in rates would support the returns on investments, providing further compensation". There would be no immediate upturn in the returns on investments for life insurance companies, as their assets have longer expiry dates, but inflation, according to the rating agency, does not have a significant impact on their credits. However, the increase in rates is beneficial to the economic capital of all insurance companies, especially life insurance firms, as the latter's Solvency II assets requirements are affected by the variations in said rates.

A SHORTFALL IN DAMAGE-RELATED PROFITS

Significant and long-lasting inflation may lead to further increases in the field of damage loss. Such a trend...