Claims inflation may lag before it materialises, PRA warns
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The Prudential Regulation Authority has warned how claims inflation can impact insurers and set out how it expects insurers to “robustly” consider the issue. How does good practice look like?
The PRA defines claims inflation as the increase in the cost over time to settle general insurance claims.
In a letter to chief actuaries of general insurers and Lloyd’s managing agents, Nylesh Shah, PRA’s chief actuary for general insurance, warned there is uncertainty in the severity and duration of claims inflation expected, and there may also be a lag before it materialises.
“This has given rise to additional uncertainty around future claim settlement costs which will need to be considered in business planning, reserving, and risk management,” he said.
Inflation has hit insurers hard. Direct Line and Admiral saw their profits slashed by half in H1 due to inflation and other issues such as supply chain and market volatility.
Shah said technical provisions must be calculated based on “up-to-date, credible information and realistic assumptions” and therefore, “claims inflation should be robustly considered”.
In addition, the PRA expects firms to ensure the risk of further claims inflation is appropriately allowed for in the internal model solvency capital requirement calculations and where the standard formula is used to calculate the firm’s SCR, that it remains appropriate.
Examples of good practice
Shah said the authority had observed examples of good practice across a selection of insurers from across the London market, as well as retail and commercial insurers:
· Consider how inflation is manifesting in claims, and how this may change over time.
· Assess the appropriateness of existing reserving techniques in the current inflationary environment.
· Maintain feedback loops between claims, reserving, capital modelling and underwriting/pricing functions.
· Consider whether the uncertainty around claims inflation has been adequately allowed for in the capital requirement.
· Ensure that risk management systems continue to be effective.
The PRA continues to monitor and review how insurers prepare for and allow for claims inflation in their reserves, claims, capital requirements and underwriting/pricing.
What other examples of good practice can insurers provide?
