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Inflation : more problematic for insurers than disasters and debt?

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Insurers are at more risk as a result of inflation than they are as a result of natural disasters, such as tsunamis, or from the European sovereign debt crisis.

This is according to Martin Sullivan, the deputy chairman of insurance broker Willis Group Holdings Plc. Speaking at a conference in London last week, Mr Sullivan said, “Inflation could well be the monster under the bed.” He added that rising prices “can be more deadly to an insurer’s economic health than defaults, earthquakes, winter storms, or tsunamis.”

The speech was Mr Sullivan’s first since he left his role as CEO of American International group (AIG). It came in response to figures showing consumer prices rising at their highest levels since 2008 in the US, the UK, China and Germany.

The problems arise when the cost of covering injuries, rebuilding houses or paying legal claims increases rapidly between when a policy is sold and when a claim is made. Low interest rates, which many countries, including the UK, are also dealing with, can exacerbate the problem.

Mr Sullivan also warned, “Of all the issues out there, inflation could be the one that comes to surprise a lot of companies.” He added that reinsurers will either be feeling the pinch on their balance sheets or will be increasing their rates.