Higher inflation could hit insurers' underwriting profits and is making companies more wary about the casualty risk they are assuming, according to Richard Pryce, CEO of QBE European Operations Plc.
The threat of higher inflation sent global stock markets crashing in early February. Inflation will increase insurers' claims costs and their loss ratios, that is, claims paid as a percentage of the premiums they bring in.
Speaking to journalists about the QBE Insurance Group Ltd. division's 2017 results, Pryce said: "Inflation has spooked the stock markets a little bit over the last few weeks, and inflation has a separate impact on the insurance industry. Lack of inflation has been our friend on loss ratios for the last six or seven years. That is something we are watching very carefully as we move into a more inflationary environment."
Pryce added that the threat of higher inflation was making insurers more cautious about taking on casualty risk.
"We are going to be in a higher inflationary environment in the next two or three years," he said. "Wherever you are — whether you are in Europe, the U.K., the U.S. — you are going to see more inflation, and that is something that can significantly impact casualty. More and more [insurers] are circumspect around casualty and inflation, and I think you are seeing that in some of the reinsurance purchases as well. People are far more cautious around that area."
The risk of higher inflation would not necessarily reduce QBE's appetite to write casualty business, Pryce said, but cautioned: "It is making sure you get the right price and the right structure."
The underlying underwriting performance of QBE European Operations deteriorated in 2017 due to a combination of lower reserve releases and higher natural-catastrophe claims. The combined ratio — a key measure of underwriting performance that shows claims and expenses as a percentage of premiums — increased to 97.28% from 93.2%, group results show.
Adding to this was a rise in the commission ratio — the commission paid to brokers as a percentage of premium — to 19.2% from 18.4%, which the company attributed to "ongoing commission pressure in the London market insurance operations."
Pryce was concerned about the cost of doing business in London, including commissions. "It is very difficult to make the right return if you are going to have a high commission cost and a high operating cost and you are still in a competitive environment," he said. "I don't see, at the moment, any immediate reduction in that."
To tackle the cost, QBE Europe would look to "diversify our distribution base," he said, adding: "You can touch a lot of those customers through your distribution [elsewhere], so you don't have to worry quite so much about using the London market."
While several factors conspired to eat into QBE Europe's underwriting profit in 2017, the insurer did have a boost in one area. Its bill for the change to the U.K. personal injury discount rate fell to $141 million in the second half of the year from the $156 million it had recorded at the half-year stage because it revised its internal assumption for the discount rate to positive 0.25%.
The U.K. government cut the personal injury discount rate, also known as the Ogden rate, to negative 0.75% in March 2017 from positive 2.5%, but has suggested that a proposed change to the law governing the rate will push it back up to between 0% and positive 1%. It is still unclear if and when this change will be made.
"We took soundings and used our external advisers, and we felt that was a prudent rate to adopt going forward," Pryce said. "I don't think we're alone in assuming a number of around that level."