EU warns on insurer provisioning as high inflation eats value

EU national insurance regulators must buckle down on oversight to ensure heightened inflation readings aren't leading to inadequate technical provisioning, the EU's chief regulator has said in a year-end warning to the national supervisory authorities.

During decades of low inflation, risk-assessment methodologies that downplay the impact of inflation may have taken sufficient root to catch insurers unawares under the new macroeconomic conditions, EIOPA warns. Insurers may have been lulled by the "simplicity of the approach and the lower probability of forecast error in a cost/benefit analysis" of inflation-muting approaches.

"The current inflation trend may lead to a risk to underestimate technical provisions if the same methodologies continue to apply," EIOPA chief Petra Hielkema said in her supervisory statement to national regulators.

Inflation is not everywhere the same risk: "undertakings should ensure that inflation is adequately considered according to the nature, scale and complexity of the risks, so that the level of technical provisions remains appropriate," Hielkema wrote.

As inflation grows, the granularity of the view must be increased. Inflation by specific claims cost category r by geography may be required of insurers, EIOPA said. Some lines of business may have never known inflation and expert judgment should point towards padding reserves.

Overall risk management systems may need a more thorough review should inflation remain high longer-term, EIOPA said. Auditors should be put on similar notice by regulators, EIOPA said.

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.