EIOPA takes stock of inflation’s impact on insurers and assesses potential future risks

EIOPA published a report examining the impact of high inflation on the insurance industry in Europe. This report analyzes the effects of both higher-than-expected inflation and increased interest rates on insurers in the region, both historically and looking ahead to assess potential future risks and vulnerabilities.
The transition from a prolonged period of low inflation and ultra-low interest rates to a new macroeconomic environment has implications for insurers‘ capital levels, profitability, and liquidity positions, as well as consequences for consumers. These effects vary across different lines of insurance and insurance companies based on their exposure to interest rate-sensitive assets, the duration gap between their assets and liabilities, and the sensitivity of their claims and expenses to inflation.
In terms of capital positions, high inflation coupled with increased interest rates affects insurers through the market-consistent valuation of assets and liabilities, as well as the need to recalibrate assumptions about the expected cost of future claims. Over the past year, European insurers‘ assets have trended down compared to their liabilities, but they have generally remained well-capitalized. However, inflation has negatively impacted non-life insurers due to increased claims and expenses, while life insurers have been less exposed due to the nominal nature of their liabilities.
The report also examines profitability, highlighting that high inflation and rising interest rates can negatively affect non-life insurers in the short term, necessitating increased reserves and gradual premium adjustments. Conversely, life insurers may face reduced profits due to higher expenses caused by inflation.
In terms of liquidity, insurers‘ positions come under strain due to several reasons, including the decrease in the value of liquid assets as interest rates rise, higher claims costs, policy lapses, and potential margin calls on derivatives. While there has been a deterioration in insurers‘ overall liquidity positions in 2022, forward-looking projections suggest that insurers hold sufficient liquid assets to meet additional margin requirements resulting from further upward movements in interest rates.
Furthermore, the report discusses the impact of high inflation on consumers by eroding the value of their savings, deepening the protection gap, and influencing their financial decisions, such as the possibility of considering alternative savings products with higher returns.