After a year of extreme inflation and cost issues, the global economy appears to be slowing as we conclude 2023. The excessive inflation of the past few years compelled central banks to raise interest rates, as countries are aiming to place weight on inflation risks. Thus far, the international community’s interest rate increases have appeared to constrain global inflation a bit, but it’s likely the increased interest rates are simultaneously slowing real economic growth. The convergence of these global economic woes, amongst other emerging risks, have created challenges for the insurance industry.
While the higher interest rates may help insurer’s investment income, many insurers are dealing with underwriting losses. In the US, the second quarter showcased a 103% combined ratio according to S&P Global Market Intelligence 2023 US P&C Insurance Market Report. Underwriting results have been particularly troubling in personal lines, particularly within the auto sector. Inflation has driven up claims costs as the costs of materials and labor used to repair or replace damaged property has been elevated. According to APCIA, ‘auto claim costs are rising faster than the CPI and outpacing rate increases by car insurance companies’. This is occurring as frequency is also increasing in auto insurance. While much of this is playing out in US auto insurance, escalating frequency, and severity of risks in other insurance lines has also been occurring globally. This may result in society questioning insurance industry’s ability to provide economies with financial resilience when high-risk events occur.