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Region's insurance markets affected differently by inflation

The impact of inflation on ASEAN insurance markets was less than in mature Western markets, as inflation in Southeast Asia was on average lower than in the US or the EU, according to the "ASEAN Insurance Pulse 2023" report.

The Russia-Ukraine war, for example, had less of an impact on ASEAN markets, and labour markets were not as tight as in Europe, says this 7th annual edition, released by Malaysian Re. The 2023 edition focuses on the impact of inflation on the ASEAN insurers and how they tackled this challenge.

ASEAN insurers not equally affected by inflation

Inflation rates in ASEAN varied widely, with Vietnam, Brunei, and Malaysia at the lower end with less than 5%; and Myanmar and Laos at the upper end with close to or even above 20%.

In some ASEAN markets, inflation increased while local currencies depreciated, leading to higher costs for imports and thus increasing insurers' payments. Currency depreciation had a strong impact, with mature economies like Singapore trading in line with the major global currencies, while Malaysia, Indonesia and the Philippines depreciated significantly.

Inflation affected insurers differently, depending on their business model. Non-life insurers with a bias toward personal lines, particularly motor and property business, were likely to be hit hardest as higher costs for raw materials, spare parts, repair and labour drove up claims ratios. Medical insurers had to digest rising costs due to inflation too.

For ASEAN affiliates which have their assets mostly managed at group level, the impact of inflation on their investment portfolio had less of an effect than for those, which had to realise losses on their bond portfolio due to losses on the underwriting side.

And finally, the cost of operations varied greatly with insurers in markets such as Singapore spending a larger share of their budget on rising salaries.

Overall, AM Best concludes that the ASEAN insurers fared quite well, proving their preparedness and resilience.

Impact of inflation perceived differently

The consensus is that inflation is a “relevant” challenge, but part of a flurry of different headwinds which hit the markets all at the same time. Inflation did not catch insurers off guard. It had already started to rebound before the end of the pandemic and in some ASEAN markets, had been part of their reality for quite some time. In addition, insurers had risk management measures in place to stress-test the impact of inflation on their book and reserves.

However, a major concern was with policyholders, namely consumers, who often underestimate the risk of underinsurance.

Claims costs were the biggest concern for insurers. However, the effect of deteriorating claims ratios was dwarfed by the tightening of reinsurance markets since the year-end renewals in 2022. Insurers partly interpreted the hardening as a consequence of inflation, caused by the abrupt increase in interest rates and reinsurers´ costs of capital. Insurers' investment returns were affected by the same token – the tightening of monetary policy led to a decline in fixed-income securities and thus to rising unrealised – and in unfortunate cases also some realised losses. The top line was affected too, as higher sums insured drive premium volume. However, clients hit hard by rising prices might reduce their insurance buying.

Personal lines most affected

Motor, property and medical insurance were the lines most affected. According to some ASEAN insurers, prices for motor spare parts rose due to a combination of inflation and higher import costs by as much as 30% to 40% in some markets. Similarly, construction costs were up by 20% to 30%.

In medical insurance, insurers saw a continuation of the double-digit medical inflation that markets had already witnessed for some time. Due to higher import and labour costs, medical inflation accelerated further. Reserves, however, posed no major concern. The lines most affected are mainly short-term liabilities, while long-tail risks are less affected. In addition, insurers had prepared for inflationary pressure, slightly adjusted reserves, and tested their adequacy regularly.

In times of inflationary distress, consumers tend to regard insurance as a dispensable cost which they limit by buying less coverage, cancelling insurance or resorting to self-insurance. This affects particularly the personal lines. In case of underinsurance, clients might declare a reduced property value – thereby taking the risk of underinsurance. Lower insurance spending may also affect the commercial lines, as inflation plus tighter rates and commissions force policyholders to reduce coverage.

Opinions diverged regarding the relevance of underinsurance. In some cases, insureds might lack the understanding or awareness to adjust premiums to the rising value of their assets. However, at least larger corporations will increase their sum insured to reflect the impact of inflation. Insurers made quite some efforts to ensure that clients remained properly insured. For policies that do not renew and adjust automatically or include escalation or inflation clauses, insurers launched educational campaigns explaining why premiums must rise.

Insurers' response

Insurers reacted with a mix of measures to combat the impact of inflation on their underwriting portfolio. Price increases were the most frequently mentioned feature, affecting foremost motor and property – unless tariffed. Tighter market conditions were reflected by a hardening of terms and conditions – partly due to the developments in reinsurance. Insurers demanded that clients disclose how they manage their risk and asked for an updated valuation of assets to adjust the sums insured.

Furthermore, insurers pruned their portfolio and reallocated capacity, often shifting from severity to frequency risks to reduce the amount of reinsurance cover needed. The quality of the account was a dominant theme with insurers systematically screening their portfolio, increasing deductibles to force clients to better understand their own risks. Ultimately, many claimed to have shed risks that they felt were not meeting their requirements.

The findings of the report are based on 24 structured interviews with executives representing regional and international (re)insurance companies, intermediaries, policymakers and trade associations. The interviews were conducted by Faber Consulting, a Zurich-based research, communication and business development consultancy, from July to August 2023.

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