Lloyd’s on claims inflation: easy part is over, complexities begin now

Insurer reactions to claims inflation to date, chiefly visible in underwriting and pricing with a touch of IBNR reserve writing, “may have been the easy part” with the “arguably more complex phase” still lying in wait, a top  Lloyd’s oversight official warned syndicates.

“The step increase in inflation seen in 2022 may be old news, but inflation is now entering a second and arguably more complex phase,” Lloyd’s chief actuary Emma Stewart said during Lloyd’s Q2 market message.

With the initial spike in inflation, “the market broadly responded well to the need to make allowances for this in pricing, reserving and capital,” Stewart said.

“Looking back, maybe that was the easy bit.”

The real trick is in the follow up and eventual reserve and capital management, she said. Inflation will only begin to show up in the claims experience and in the data, all at a different time and a different pace in every line of business, she warned.

Lines of communication between claims officers and actuaries will need to be busy in a constant bridging of the gap between garden variety incurred but not reported IBNR and the to-be-feared “incurred but not enough reported”.

“Syndicates need to be alert to the fact that what could appear to be a benign experience … could be a result of claims inflation not emerging in the data at the pace assumed,” Stewart said. It may prove “difficult” to identify required uplifts to reserves or assure that “allowances are not wiped out prematurely.”

None of which will mean that underwriting and pricing are off the hook in the process, she noted. “It’s critical that this analysis is fed back into the areas of planning and capital,” Stewart said, “to make sure that price and capital adequacy is generally appropriate.”

Lloyd’s will be addressing its syndicates on the matter over the coming months with best practice guidance on risk and claims management.

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