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December 8, 2022



Inflation risk is a serious issue for the property and casualty (P&C) insurance market, one with no quick fixes and no easy relief in sight. At this point it’s unclear what direction inflation will take, so insurers need to start preparing for a variety of outcomes. McKinsey’s latest report dives into the three most likely scenarios insurers will be facing.  We’ll examine each in turn. 

Nimbleness and speed to market for new products are key drivers of success in an uncertain market, and will be major stumbling blocks for insurers of all sizes. Currently, it takes between 12-18 months to launch a new product, and 3-6 months to update an existing one. According to McKinsey, “In an environment of rapidly rising prices, speed to market is critical. Delays of just a few months can cost millions of dollars of lost revenue.” Therefore, in each of these scenarios solving the speed to market challenge is going to be paramount.

Read: Countering inflation: How US P&C insurers can build resilience | McKinsey


What: The Federal Reserve raises rates to 3-4 percent and energy, food, and commodity markets stabilize. For insurers, this would likely erode near-term combined ratios, but ratios would eventually return to long-term norms. Carriers with large and diverse portfolios and healthy surpluses would be favored. 

Why it matters: The large insurers will be able to dip into their cash reserves to endure the near-term losses relatively easily. However, smaller insurers will be at a disadvantage because of their lower risk diversity and smaller balance sheets. In addition, smaller insurers have less cash to invest in tech, which can cause higher operational costs and lengthen time-to-market for new products.

What to do: Smaller insurers (and other insurers with small cash reserves) would need to find ways to mitigate the tech advantage held by larger companies, and thereby unlock the operational savings and speed to market benefits of digitization. One way for insurers to advance their tech is by partnering with SaaS insurtechs who have been driving down the costs of industry-leading solutions. 

Insurers that are able to solve the speed-to-market challenge will be able to pursue focused initiatives to mitigate inflation risk:

  • Launch programs in new niches to diversify portfolios
  • Bake-in inflation mitigation by launching parametric insurance programs
  • Find tech partners who can help drive operational savings and speed to market
  • Leverage digital channels to increase access to customers and drive down costs

What: Global trends continue to disrupt the energy and commodity markets, causing the Fed to raise rates substantially above 4 percent. This could harm the overall economy, and real estate construction in particular. In this scenario, the market would continue to harden and insurers who find profitable pockets and maintain underwriting discipline will come out ahead. 

Why it matters: This is an ugly place to be, but in a world where inflation is skyrocketing, every nickel matters. Getting better and more reliable data will enable insurers to maintain the underwriting discipline needed to drive down loss ratios. 

What to do:

  • Better price and manage risk by focusing on connecting to more data sources and data partners
  • Focus on industries and niches that will weather the storm best, such as consumer staples, utilities, and health care

What: Perhaps the least likely scenario, in which price inflation continues and the Fed continues to raise rates over a prolonged period of time. This could lead to a period of stagflation where inflation remains high despite high interest rates and slow economic growth. In the short-term, insurers would experience significant losses, but as is sometimes the case in foreign markets, the consistent increase could be offset by premiums and investment returns increasing at the same rate as inflation. Operational excellence throughout the value chain will determine which insurers come out on top. 

Why it matters: Although the initial downturn will affect the balance sheet, the eventual return on investments would offset some of the initial losses. 

What to do:

  • This could lead to good, old-fashioned underwriting blocking and tackling: using actual cash value vs replacement costs, and coinsurance penalties
  • Focus on automation to minimize costs from expensive processes
  • Create personal lines products targeting high net-worth individuals who will be more likely to make money from rising rates

Resilience in the face of inflation requires flexibility. High levels of uncertainty create an environment where insurers will need to implement changes quickly to avoid costly operational mistakes.

The insurance world is slowly transitioning away from the slow moving legacy systems that were built decades ago, and moving toward modern solutions. The legacy systems have tried to keep up with upgrades and acquisitions, but the underlying platforms are a leading cause of the 12-18 month development cycle for new insurance products. For insurers that have been kicking the tires on adopting new tech, now is the time to make the transition to avoid major losses due to product implementation delays.

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