Shock to the system: Insurance’s role in absorbing the impact of inflation

Heard in the news and felt in our pockets; since the onset of the COVID-19 pandemic, inflation has, with ever-increasing regularity, become a fact of life. Back then, higher commodity costs, supply-chain bottlenecks, and rising energy prices lay at the heart of the matter. Russia’s invasion of Ukraine in late February 2022 only served to push the needle further. 

Now, we are feeling the effects of an inflationary environment and periods of lower economic growth, illustrated most plainly by price shocks and the subsequent cost of living crisis. In such a landscape, insurers have a unique perspective and, indeed, responsibility in absorbing the impact for both consumers and the wider economy. 

In plain sight, the high cost of living and decreased purchasing power of individuals has an obvious consequence of a lower demand for insurance – especially in areas where customers view the expense as non-essential. 

However, this ignores the crucial role insurance plays in loss prevention and reduction, especially during times of high inflation. At a time of such economic volatility, when unexpected (and uninsured) losses have a larger financial sting than they ever have before, the safety net of insurance can be the difference-maker.

Take a household fire for example – it is now much more expensive to repair or rebuild damaged property due to the increased cost of building materials and services, and in many counties, wages haven’t increased at the same rate. What’s more, repairs can take longer due to labor shortages and disrupted supply chains. No coverage (or underinsurance, where the total value of insured assets has been wrongly estimated or hasn’t increased in line with inflation) can lead to a significant financial burden that can have a disastrous impact on people’s lives. 

 

On the flip-side, continued financial shocks can lead to an increased risk awareness amongst consumers, because they serve as a reminder of the uncertainties and risks present in today’s world. When people are faced by financial difficulties, or see others affected by unexpected events, they tend to become more cautious and look for ways to mitigate potential losses. The result is an opportunity: for insurance companies to demonstrate their value by managing inflation risk and providing financial security and peace of mind to their customers. The Geneva Association – think tank for the global insurance industry – argues in it’s recent report that for customers and society at large, the value of insurance increases in times of inflation. Arne Holzhausen, Global Head of Insurance, Wealth and Trend Research at Allianz comments, “Via the insurance industry, financial burdens can be smoothed and shared over time. While we cannot undo inflation for our customers, we can act as a buffer, cushioning the shock to an extent.” 
In the face of persistent inflationary pressures, the insurance industry has much work to do in remaining relevant and valuable to customers. “A little more understanding of the things that keep our customers awake at night brings us all into better alignment as a profession, which can only be a good thing,” says Nick Hobbs, Chief Distribution & Regions Officer, Allianz UK.  While insurers must take action to mitigate profitability and solvency challenges (only a profitable insurance company can offer reliable risk protection in the long run), it is essential that insurers put customer needs at the forefront and avoid a purely commercial response to inflation. In other words, insurers have to think beyond higher priced premiums, stringent underwriting requirements and reduced risk appetite. 

There are a number of actions insurers can take to respond to the new macroeconomic environment and soften the blow to customers:

1) Product innovation: Insurers can offer products and solutions that address some of the macroeconomic risks customers are facing. For example, more affordable low-cost products with an increased focus on risk and loss prevention, as well as usage-based propositions. A good example of the latter is telematics technology.

2) Indexation: Incorporating an indexation feature in insurance policies ensures that the policy benefits keep up with the rising costs of living and inflation.

3) Review of indemnity periods: At times of shock, a small business might not fully understand how long it will take to return to full operations. Drawing customer attention to this and working together to set realistic indemnity periods is crucial. 

4) Investment in technology and digitalization: Technology can help insurance companies automate various processes and streamline their operations, reducing costs and increasing efficiency. For example, online marketing and distribution, digital customer self-service, and claims automation.

5) Communication with customers: Educating customers on the potential impact of inflation on their coverage and the risks of underinsurance, as well as providing regular updates on any adjustments to products or pricing to account for inflation are key.

6) Strategic partnerships: Insurers can combat inflation by partnering with other organizations, such as healthcare providers or technology companies, to develop new products and services that are more efficient and cost-effective. 

7) Diversification of investments: Preventative asset allocation that invests in a range of different asset classes, such as equities, real estate and commodities can help insurers to spread their risk and generate returns that are not undermined by inflation. Insurers can also invest in inflation-linked bonds, building additional protection through investment returns that are directly linked to inflation.

“We can’t cover all eventualities, but we can provide a better degree of predictability by maintaining standards in our profession, providing sterling and reliable advice, enabling products that respond to the uncertainty of our time, and communicating with our broker partners,” says Hobbs.

At Allianz, the response to inflation is already visible across our global business lines. “Most Allianz operating entities have always applied indexation to the customers’ sum insured where relevant, such as Household or Commercial property values or Motor policies with an agreed value,” says Darren Robb, Head of Underwriting and Portfolio Management within Global Property and Casualty. “In markets where this was not the case, many actions have been taken in the last 12 months: inflation clauses have been added to policies, customers have been contacted directly to inform them of the need to update their sum insured data, and where possible, external inflation benchmarks have been automatically applied to sum insured. A good example of customer communication in action is the ‘Are you adequately insured?’ marketing campaign which ran in Malaysia from July to October 2022, encouraging customers to use the online sum-insured calculator and adopt an agreed value clause in home insurance policies.”

At Allianz Global Corporate & Specialty (AGCS), the team works with clients and brokers in the run up to renewals to update asset values and ensure clients have appropriate cover that is fit for purpose, understood, and appropriately priced and financially monitored in our portfolio. “Nobody wants a dispute about underinsurance after the loss. It’s much better for all parties to get the right value and charge the right premium in the first place,” says Philipp Cremer, Global Head of Claims Performance & Liaison at AGCS.

Also on the investment side, our teams have their fingers permanently on the pulse, building in protection for our business and customers where possible. In the investment portfolio, Allianz further increased its already sizable allocation to inflation-linked bonds over the past year. This provides additional protection should inflation turn out to be more persistent than markets currently anticipate.

The Allianz Group is one of the world's leading insurers and asset managers with around 125 million* private and corporate customers in nearly 70 countries. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing around 746 billion euros** on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage about 1.8 trillion euros** of third-party assets. Thanks to our systematic integration of ecological and social criteria in our business processes and investment decisions, we are among the leaders in the insurance industry in the Dow Jones Sustainability Index. In 2023, over 157,000 employees achieved total business volume of 161.7 billion euros and an operating profit of 14.7 billion euros for the group.
* Including non-consolidated entities with Allianz customers.
** As of March 31, 2024.
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