The effects of the Russian war of aggression against Ukraine and of the ongoing supply chain disruptions caused by the pandemic have significantly contributed to inflation rates in recent months reaching levels not seen for a long time. Insurers are feeling the cost pressures: a look at the different insurance classes has made this very clear. From a supervisory perspective, the important thing now is that they draw the right conclusions from this.

In property and casualty insurance, price increases will have a considerable impact on insurers' annual financial statements, and these effects will even be seen in the statements for 2022. Higher rates of inflation result in significant increases in claims expenditures, particularly in connection with repairs, or where replacement cost coverage has been agreed. This results in higher technical provisions in the insurance classes affected. The German Commercial Code (Handelsgesetzbuch) clearly sets out a basic principle for claims reserving: it must be ensured that the obligations arising under insurance policies can be met at all times. Due to the high rates of inflation, insurers may have to increase existing provisions even before the end of this year. From a supervisory perspective, it would not be acceptable for insurers to count on inflation rates normalising and to use up all of their existing reserves in the meantime. Insurers will also have to adjust their claims provisions under Solvency II if their inflation predictions are too low. This will be the case for most companies.

Of course, insurers will have to consider claims development in rate-making – also with regard to future expected claims. Increased inflation will therefore inevitably result in higher premiums in non-life insurance in 2023. And this will affect both new and existing policies. From a supervisory perspective, one thing is clear: faced with high inflation, insurers should not compromise on premium prices.

The situation is somewhat different for health insurance companies. Currently no significant inflation can be observed in the healthcare sector. But that could change quickly, namely when the increasing costs of service providers and higher production costs for equipment and medicines etc. result in higher expenses. The industry will certainly be able, and obliged, to pass these increases on to customers in the form of premium adjustments. But this will only take effect following the usual delay.

What is the outlook with regard to inflation? In the short to medium term we can expect little change. For the coming year, the Deutsche Bundesbank is predicting inflation above the 7%-mark, rather than below. And the implications of this are clear: insurers must prepare for long-term higher inflation rates. There is no getting around that.