Stagflation: the risk is back, but not 1970s style
For Life & Health (L&H) insurers, sustained high inflation has primarily indirect effects, as rising interest rates support profitability. Investment results benefit as bond portfolios roll over into higher yields, while the profitability of saving products with guarantees – a large legacy book of the life industry – improves. The nature of fixed-benefit products insulates them from claims inflation, though indemnity-based health insurance is exposed to claims pressure in the near-term. However, we expect higher inflation to erode consumers’ disposable incomes and the value proposition of (in-force) saving policy benefits, resulting in higher rates of lapse and surrender.
Given the many uncertainties today, significant downside risks to insurers’ profitability remain. For example, if our alternative global recession scenario were to play out, premium revenues would fall across all lines of business and in all regions. And the “1970s stagflation” scenario would curb demand in both P&C and L&H. In addition, credit spread widening and equity losses would create large mark-to-market losses on assets. Downside risks can be mitigated by strong capital and risk management, underwriting rigour, reinsurance, asset allocation and hedging.
