Inflation: How Insurers Can Inflate Their Chances of Success

The great satirist Will Rodgers once quipped, "Invest in inflation. It's the only thing going up." While Rogers' statement is hyperbolic, the sentiment that it can be difficult for insurers to maintain profitability during inflationary periods is not. With the latest inflation reading at 8.6% y/y, the highest since 1981, leadership is forced to adapt to a uniquely challenging business environment. In this blog, we'll talk about some of the obstacles carriers face and then present some strategic solutions, namely the use of technology, to soften the impact of inflation.

Problem: Claims Payouts are More Expensive

In the simplest terms, inflation causes the prices of goods to rise. As such, the replacement or repair cost of basically all items goes up. From repairing a damaged roof to replacing a totaled car, insurers will have to pay out a significantly higher amount than they did for a similar incident a year ago. According to the U.S. Bureau of Labor Statistics, a replacement for that "totaled car" is up a staggering 27% from last year. (Consumer Price Index News Release - 2022 M05 Results (bls.gov)) And that doesn't even include the increased cost of labor for repairs stemming largely from a labor supply shortage and the need to raise prices to keep up with inflation.

Longer tail claims such as workers' compensation are also negatively impacted by inflation because inflationary forces may dilute reserves and payroll for injured workers is higher. Furthermore, treatment costs necessary for expedient rehabilitation are more expensive as well.

Problem: Labor Shortages

According to the U.S. Bureau of Labor Statistics, there were 11.2 million job openings in May. With 5.9 million Americans collecting unemployment benefits, the implication is that there are nearly twice as many job openings as job hunters. (Job Openings and Labor Turnover Survey Home Page (bls.gov)) As such, many carriers are having difficulty finding workers to keep their business operational. To lure workers in today's hyper-competitive environment, they have been forced to raise wages and offer uniquely attractive benefits, both of which hurt the bottom line. Moreover, labor shortages can lead to insufficient staff to handle claims and, in turn, customer dissatisfaction. The result may be increased customer churn.

Problem: Profitability from Core Business Activities

In a world with ultra-low interest rates, price stability, and central banks pumping liquidity into the economy, an insurer may be able to maintain profitability with a loss ratio exceeding 100%. However, with the economy on the brink of a recession and the S&P 500 (Wall Street's broad benchmark) having the worst first half of the year since 1970, investment returns are far from guaranteed. In the wake of today's volatile economic backdrop, carriers may need to look to policyholder premiums as a primary source of income.

While there is no panacea to inflation, Celent recommends carriers take a series of steps to best insulate themselves from it.

Recommendation: Focus on Automation

Automation can help carriers thwart some of the problems emanating from inflation such as rising claims payouts and workforce shortages. An area where automation can have a particularly material impact is in the claims process. By automating high-value low-cost claims, carriers can achieve myriad benefits. Virtual FNOL allows remote transmission of relevant claims information without a human adjuster. If deemed legitimate, the claim can be processed without human intervention, and labor resources can be devoted to claims requiring human discretion. Additionally, swift payment of resolution of claims can increase customer satisfaction and, in turn, stickiness.

Recommendation: Adopt a Pragmatic Organizational Mindset

Inflation may cause some carriers to tighten their belt on emerging technology investments in favor of those more grounded in solving today's business problems. In this period of potentially limited profitability, organizations must try and maximize value from innovation investments. In his recent blog Exponential Innovation and the 64/4 Rule, my colleague Rob Norris discusses how the 64/4 Rule can help employees approach problems with a value-driven mindset.

Recommendation: Consider Raising Premiums

This recommendation isn't necessarily technology-focused but is still worth mentioning. To keep up with rising costs and potentially deceased income, insurers should absolutely consider raising policy premiums when necessary. Granted, the rate adjustment process is not instantaneous, and there are a series of bureaucratic hurdles, to put it mildly, that carriers need to go through to raise rates. As such, rate adjustments may lag real-time price increases. However, when inflation ultimately subsides (and anyone who tells you they know when is lying), carriers will eventually be able to benefit from the tailwind of rate increases.

Inflation can be an extremely destructive force, but when the dust settles, the winners that emerge will be stronger for it and poised to capitalize on tomorrow's fortuitous market conditions. By increasing automation, approaching technology investment with a grounded mindset, and raising rates when necessary, carriers can maximize their chances of surviving…and then thriving.