Don’t use up reserve buffers for inflation, German regulator tells insurers
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Germany’s insurance supervisor BaFin has told insurers to prepare for long-term inflation rates and ensure their obligations are met at all times.
Frank Grund, executive director for insurance and pension fund supervision at BaFin, said the effects of inflation are clear. For instance, in property and casualty insurance, he said claims expenses increase significantly, especially where repair services are required or where replacement value has been agreed.
He warned due to high inflation, “companies may have to increase existing provisions this year”.
Writing in BaFinJournal, the regulator’s magazine and news bulletin, Grund said: “From the supervisory point of view, it would be unacceptable to bet on the high inflation rates normalising and in the meantime to completely use up existing buffers in the reserves.”
He added firms that have underestimated inflation expectations will have to adjust claim provisions.
Grund said increased inflation will inevitably lead to higher P&C insurance premiums in 2023: “In view of the high inflation, insurers should not make any compromises when it comes to premium quality.”
For health insurers, Grund described the situation as “somewhat different” as BaFin has yet to notice medical inflation. But he warned this can change quickly when the rising costs of service providers and the higher production costs for materials or medicines lead to higher expenses.
“The industry will certainly be able or will have to pass this on to its customers through premium adjustments, but only with the usual time lag.”
BaFin’s warning came as E+S Rückversicherung AG, a subsidiary of Hannover Re responsible for the group’s German business, said it expects significant improvements in pricing conditions in P&C reinsurance due to “heavy claims expenditure and soaring inflation”.
Hannover Re said price rises are unavoidable as both primary firms and reinsurers are facing “a sharp rise in inflation” and “sustained high expenditures” for claims from major catastrophes.
In the UK, the prudential regulator wrote to chief actuaries of general insurers and Lloyd’s managing agents last week to set out how it expects insurers to “robustly” consider claims inflation. The Prudential Regulation Authority warned there may be a lag before claims inflation materialises.
What else can insurers do to address the impacts of inflation?
