3 minute read
The impact of global inflation on insurance
The impact of global inflation
on insurance
Following the disruptive Covid-19 lockdowns of the past two years, global supply chains have struggled to normalise, leading to a spike in the price of almost all goods. This sustained hyperinflation has seen the dramatic increase in the price of many commodities such as oil, wheat, and other crops and even computer chips, leading to inflation rates last seen several decades ago.
By Soul Abraham, Chief Executive for Retail at Old Mutual Insure
It is likely to persist for at least the next 12 months and is having a significant impact on our industry. Already, we are seeing a much higher inflationary figure than what was expected (almost three times our worst-case scenario) and this is significantly affecting our claims cost base, particularly in our motor portfolio.
While we are working closely with our supplier base to mitigate these costs, we cannot offset all of them and unfortunately some must be passed on to our customers in the form of premium increases.
Trends impacting inflation, and claims costs
Demand is increasing rapidly around the world after two years of Covid-19 restrictions. The sustained increase in inflation is caused by the resumption of global economic activity after long lockdowns have sent demand, and subsequently prices of goods, higher.
Supply chain disruptions are being driven by port congestion, skyrocketing freight costs, and the widely publicised semi-conductor chip shortages. China’s strategy of hard lockdown when the coronavirus is detected will also influence the
supply chain. Shanghai – a major manufacturing centre globally – also experienced lockdown.
We are also experiencing double-digit inflation numbers in the average cost of motor vehicle claims, mostly owing to the global semiconductor and microchip shortages, which have negatively impacted the availability of new cars.
And the demand for used cars has exploded since the start of the pandemic, which is driving a reduction in depreciation of vehicles and leading to a higher replacement cost at claims stage. In addition, disruptions in the global shipping and transportation arrangements have led to and increased cost of vehicle parts and repairs.
Shipment costs across the globe have increased drastically, directly impacting costs of imported goods. A significant amount of our costs relates to imported goods. There is also a huge shortage of containers – artificially increasing the supply challenge.
In addition, we cannot ignore the conflict in Ukraine, as a result of Russia’s invasion, which will have a knock-on effect on inflation.
Ford, for example, has already said that its plant in Poland has come under pressure due to part shortages. This has led to a halt in production. There is still lots of uncertainty on how this will play out.
We have also noted a spike in geyser repair costs, amplified by an increased volume of geyser and accidental damage claims caused by loadshedding.
To combat the sudden spike in general prices, the South African Reserve Bank and other central banks across the globe have raised interest rates, further putting pressure on the consumers’ spending power.
The broker’s role in this environment
These extraordinary circumstances mean that it will cost more to provide the same level of cover and policyholders can therefore expect aboveinflation average renewal increases as the year
progresses.
Brokers are critical, especially in situations like these where external factors could cause financial
strain on customers. Insurers therefore rely heavily on our partners to continue educating customers that it becomes even more important to remain fully insured during tough financial times.
It is highly unlikely that we will have deflation once some of the supply chain issues are resolved over the next 18 months, but we hope we will return to a scenario with more normal claims inflation in the medium to long term.
