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(Re)insurers to count cost of rising inflation

After years of lacklustre price growth, accelerating inflation, particularly in the US and the UK, has re-emerged on the insurance radar.

Willis Re CEO John Cavanagh earlier this month called faster inflation an "unhelpful trend" that could pressure reserves, while Keefe, Bruyette & Woods analysts warned this week of higher claims costs resulting from the price uptick.

In the US, analysts expect this year and the next to mark the first sustained period with inflation above 2 percent since before the credit crisis. In November, the rate of inflation was 1.7 percent. In addition, a recent survey from Bank of America Merrill Lynch found investors' inflation expectations were at a 12-year high.

In the UK, the National Institute of Economic and Social Research predicted inflation could peak at 4 percent in the second half of the year, mainly because of the pound's post-Brexit nosedive. That compares with 1.2 percent in November and with the Bank of England's more modest 2017 forecast of 2.7 percent.

In both countries, the expected increase in inflation emanates in large part from the big political surprises of 2016 - the UK's Brexit vote and Donald Trump's victory in the US presidential election. That raises the question of whether inflation forecasts for long-tail insurance have been accurately priced in.

Aon Benfield's international head of market analysis, Mike Van Slooten, noted that forecasters have a post-credit crisis history of misreading the outlook.

He added: "Getting inflation expectations wrong is something to worry about. In the past few years, because claims inflation has been so low, you have had a lot of money released from reserves that has propped up results."

But the impact of inflation varies widely. As Berenberg analyst Trevor Moss pointed out, rising food and electricity prices make no odds for the (re)insurance industry, but higher costs of replacement machinery and car parts, for example, are worrying.

But even if higher claims costs do emerge as a corollary of faster price growth, Aon Benfield's Van Slooten noted that the global economy is "bifurcated".

Some key developed markets, notably the Eurozone and Japan, are suffering from anaemic inflation, or even deflation. That should help offset upward pressure on claims costs from the US and the US, he said.

Van Slooten also noted that higher inflation will have multiple effects.

"If it is accompanied by economic growth, that's good for the industry. If the new administration in the US starts to ramp up their infrastructure spending, that will create insurable exposures."

Another silver lining of faster inflation is a potential pick-up in demand, particularly for reinsurance.

Berenberg's Moss predicted insurers could look to buy more excess-of-loss or stop-loss policies.

But he added: "Reserve releases should definitely be less as insurers ought to be more cautious."

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