Inflation impact: what the current economic climate means for insurance

High debt, user spending, strong consumer demand and global economic conditions continue to drive inflation – and it’s impacting almost every facet of our personal and professional lives.

And, with forecasts suggesting this isn’t a short-term situation, it looks as if we’re all going to have to buckle in for the ride.

“It’s just difficult for a lot of people out there,” says Phuong Ly, Chief General Manager Commercial at Allianz.

“The cost of living is going up, energy prices are going up, and the geopolitical environment, on top of all that, is creating a huge amount of uncertainty for everyone.”

“The challenge for most governments is providing leadership and giving people a direction in which they’re taking the country, as well as communicating what are they going to do and to support to keep inflation manageable.” is struggling to know what levers to pull to bring inflation under control while minimising harm to the family budget.

“Inflation is the fact that we overheated the economy by injecting too much cash into the economy without there being a cache. We fundamentally printed money to get Australia through the COVID-19 crisis.”

Hansen is confident that Australia will ride out this period better than most, although acknowledges significant inflationary pressures are still on the horizon for insurance policyholders, with increases across some supply chains still expected.

“An inflationary increase isn’t necessarily going to account for that, and for a lot of people, I fear when something goes wrong, they are going to be in a very challenging space.”

As the cost of capital, labour and materials continue to increase, the cost to claim and cost of acquiring funds increases, as does third-party costs which all add to rising insurance costs.

As reinsurance claims continue to rise, along with increased catastrophes placing greater risk on insurers, the sector is left in need of a multi-faceted approach to bring down insurance costs.

Hansen is finding the availability of products due to decreased appetite for risk a far greater issue for his clients.

“We’ve seen a decrease in competition as we’ve seen some underwriters offering that product leave the market, and not seeking to have any availability in that asset class.”

The market is suffering from decreased capacity as brokers struggle to find suitable insurance policies for some risks like professional indemnity, cyber, property – which Hansen says is ‘very challenging for brokers’. Ly says insurance is often a ‘grudge purchase’ for customers, but this offers a huge opportunity for brokers to lead the way on educating and informing clients of the drivers behind the change and uncertainty in the current market.

“Take the opportunity to provide insights and thought leadership for your customers. Keep them informed about what is impacting the market and how to best equip themselves to be ready now and for what lies ahead. Being informed of the issues, will ensure your customers can make the best choices for their needs.”

Hansen believes this is the right time for brokers to innovate and be of value to clients.

“We need to reinvent ourselves,” he says. “We provide advice as a service. First and foremost, that’s what we are, that’s what we do. We need to see ourselves as professionals, and we need to charge for our advice.

“The general public has never needed an insurance broker more than they need one now. If anything’s proved this, it’s the catastrophes that have run across the eastern seaboard for the last 12 months.”

Five things brokers need to know about inflation

1. The high level of underinsurance in Australia isn’t going anywhere and the cost of rebuilding or replacement is increasing. Check your clients are sum insured for the correct amount.

2.Accurate valuations are critical in the current market. The old adage of just increasing your sum insured by inflation or CPI won’t cut it. 3. Brokers need to focus on the quality of advice to be a salve for clients facing uncertainty in their economic futures. Increasingly, the broker is becoming a critical point of contact for clients. 4.Understand the impact of inflation on a client’s business from the right sum insured level or if profit levels will be impacted by inflation. 5. Really get to know your clients. A good asset management plan and a good business continuity plan are key to helping clients present their risk in the best possible light.