It’s been quite a while since property and casualty (P&C) insurers have had to strenuously flex their inflation-forecasting muscles, but the time has come to get in better shape.
The current debate about whether today’s inflation environment is transitory or structural is, in our view, secondary to the issue of how P&C insurers can best identify and cope with inflation volatility. Even if inflation eases when some supply bottlenecks we now face are loosened, it would not surprise us if the inflation rate would yo-yo over the next year or more.
That prospect of volatility is just one of the reasons that argue for getting sharper at recognizing and appropriately reacting to today’s volatile inflationary environment. That capability may be one of the most valuable competencies when it comes to improving an insurance business’s combined ratios and, ultimately, profitability in this current dynamic economy. Forward-looking companies have several paths to pursue when assessing and managing risks associated with inflation. In this paper, we present some practical steps that can be taken now to mitigate inflation risk.