Remember 1970s stagflation? Why insurers should pay attention to the World Bank

Lingering impacts of COVID-19 and Russia’s invasion of Ukraine have magnified a global economic slowdown and raised the risk of stagflation – in which long-term, feeble growth combines with high inflation – the World Bank says in its latest prospects report.

Global growth is expected to fall from 5.7% in 2021 to 2.9% in 2022 — below the bank’s 4.1% January prediction. “For many countries, recession will be hard to avoid,” said World Bank president David Malpass.

Canada’s central bank, meanwhile, is applying gradual interest rate hikes in hopes of easing inflation while engineering a soft landing for the economy.

A report from Aon noted inflation is expected to moderate over the next couple of years. Still, it added, while price hikes will be gentler than those seen during 2021, they are expected to trend higher than pre-COVID-19.

The “Bank of Canada (BoC) is expected to try and cool down the economy through a series of interest rate hikes over the course of 2022,” said Aon’s report. “The BoC expects high inflation to remain throughout 2022, but to ease to be around 2.5% in the second half of 2023 and return to [its] 2% target in 2024.”

While recent supply disruptions and sanctions spurred by the war in Ukraine are now a leading inflation driver, Aon’s report noted a shift towards goods purchases (and away from services) early in the pandemic was responsible for the initial price shocks.

The report also noted a microchip shortage that stemmed from pandemic-forced manufacturing shutdowns, and exacerbated by geographic factory concentrations, will likely drag into 2024.

That has implications for car insurers in the form of delays for repair parts, and higher prices for consumers who need replacement vehicles.

Aon also noted prices for goods and services related to property insurance are up between 14% and 20% over the past year, due primarily to higher costs for lumber and building materials.

The company’s property cost index, which combines construction costs and CPI, shows a 9% to 11% year-over-year increase.

“The pace of inflation has increased again in 2022 after slowing down since second quarter 2021 for residential property while commercial property inflation [is] still increasing rapidly,” said Aon. “Canadian property inflation is generally less severe than in [the] U.S.”

The report also noted property loss trends lag prices, which means the full effect of inflation on loss might not be reflected until later.

In terms of insured values, Aon said personal lines are often automatically indexed to the CPI at renewal, but added “other lines might require a more bespoke approach,” and advised insurers to be careful about which inflation metric they use for indexing.

Rate increases also can be used to close gaps between actual and adjusted values.

“The same rate on an increased limit is okay as long as the limit reflects the actual values,” Aon said. “Pricing and reserving models must account for recent inflationary trends but not double count.

Further, if needed, the report noted reinsurance can be tapped for additional protection.

 

Feature image by iStock.com/tzahiV