Materials and labour shortages have contributed to surging producer prices in construction – we expect them to average 18-20% higher in the US and Germany in 2022. This is also reflected in the vehicle industry, where we forecast that the increase in price of a new car will be up to almost 11% in the US.

These rising expenses are translating to insurance, as businesses face the risk of greater losses from claims in a more expensive environment.

Further, undervalued assets risk creating a significant gap between payouts and actual damage incurred, especially as business interruption can be exacerbated by logistics issues and supply chain disruption.

This rise in claim severity means the hard market will continue into 2023. Prices will increase for many business lines, including commercial property, cyber and liability coverages.

In response, many insurers, including Swiss Re Corporate Solutions, are seeing increasing demand for innovative risk solutions such as structured multi-year, multi- line solutions, as well as parametric insurance and virtual captive solutions.

Inflation to remain high

According to research by Swiss Re Institute, average inflation reached a peak in 2022. But after hitting 40-year highs this year in the US and euro area, it will remain a concern for businesses in 2023 and beyond, trending markedly above levels in recent decades. That’s because medium- to long-term inflationary drivers will persist and remain volatile. Globalisation, the energy transition, changing demographics, elevated natural disasters and debt will contribute to a trend of rising prices.

This means pricing pressure and increasing claims costs will remain even as inflation starts to ease.

And as governments react with price caps and other policies, the ensuing volatility will create uncertainties for business. On top of this, we believe inflationary recessions are in the making for many key advanced economies.

This all combines to mean that the cost of covering business losses in the event of a claim is going up.

Insurers are being hit on both sides of their balance sheet – by high inflation and weaker economic activities. There is decreased demand for products in the face of reduced affordability, as well as increasing claim costs. The market volatility presents an extra challenge in underwriting terms as well as on profitability.

Social inflation

Another form of inflation is also making its presence felt on corporates’ bank balances.

Shifts in societal attitudes and anti- corporate sentiment, bigger jury awards and rising legal costs are raising the risks and costs for businesses of going to court. This “social inflation” is primarily driven by trends in the US, but is something businesses are increasingly having to contend with in other jurisdictions.

In addition, issues are taking longer to go through the courts – partly down to Covid-related backlogs. This means corporates face prolonged uncertainty and distraction.

Choices in a hardening market

Alongside inflation, the rising volume and severity of claims has led to a continuation of the hard insurance market. This means premiums are rising for many, and others will find it harder to access insurance in select areas because insurers’ risk appetites may be stricter.

This is in part driven by rising catastrophic costs as a result of more frequent and severe natural disasters caused by climate change. But equally, property, vehicles and many assets are becoming more expensive to repair and replace.

And with supply chain issues persisting for some products and services, the risk of business interruption is greater.

Against this backdrop, businesses may well find that a like-for-like renewal is not the best option for cover.

The impact for corporates

The biggest immediate risk is for short-tail lines. Our forecasts suggest property lines and motor will see the biggest pressure on claims, largely down to rising construction costs. Lumber costs are up 85% this year, and steel and aluminum prices have risen significantly, which will push up claims severity. Medium- to longer-tail risks are not immune though – issues relating to general or product liability, including motor liability or casualty, will be affected by wage and healthcare inflation in the longer term.

And while pressure on areas like property and motor will likely ease, sticky inflation components such as wages mean costs and claims are likely to keep rising.

Businesses should also prepare for the fact that pricing adjustments will lead to delays in payouts, potentially exaggerating the impact of any business interruption. Renewal costs are also expected to rise as prices adjust to reflect rising claim severity.

How can businesses mitigate this risk?

There is a significant risk that undervaluation will create a gap between actual losses and the insurance payout. With inflation rates and the economy moving rapidly, it’s vital that clients work with brokers and insurers to update asset values. This includes allowing for regional differences and the commodities companies use, to reflect the true value of losses or business interruption.

Data-led decisions will help corporates optimise their total risk. Here, our new Risk Data & Services solutions can help. It uses a digital twin to accurately map businesses’ assets, then overlays them with expert data to model scenarios to inform prevention, mitigation or risk transfer strategies.

Risk managers need to start conversations with insurers and brokers early. Captives, parametrics and innovative risk solutions may be more cost-effective solutions for non-compulsory lines, but they take time to establish.

So, while next year may well take us past peak inflation, it will remain on the corporate agenda for some time. Important decisions need to be made now to avoid an undervaluation shortfall causing a nasty surprise later.