The Prudential Regulation Authority (PRA) has written to the chief actuaries of PRA-regulated general insurance firms and Lloyd’s managing agents to share the findings from the watchdog’s thematic review that focused on the effect of claims inflation on general insurance claims.
“We have observed examples of good practice across a selection of insurance firms, from across the London market, as well as retail and commercial insurers,” wrote PRA’s Nylesh Shah, chief actuary for general insurance and co-head of the general insurance risk specialists division. “We expect high claims inflation to affect every general insurance firm, although the nature of the impact will vary depending upon the firm’s business model and risk profile. The impact of a persistent spike in claims inflation may result in a material deterioration of solvency coverage for some firms unless mitigating actions are taken.
“In summary, our review has identified a number of observations relating to how claims inflation differs by line of business and geography. In particular, there is uncertainty in the severity and duration of claims inflation expected, and there may also be a lag before it materialises. This has given rise to additional uncertainty around future claim settlement costs which will need to be considered in business planning, reserving, and risk management.”
Shah reminded chief actuaries that technical provisions need to be calculated based on up-to-date, credible information and realistic assumptions. Claims inflation should be “robustly considered,” he said. Regulated firms are also expected to ensure that the risk of further claims inflation is appropriately allowed for in the internal model Solvency Capital Requirement calculations.
The PRA’s review spans the following feedback: consider how inflation is manifesting in claims, and how this may change over time; assess the appropriateness of existing reserving techniques in the current inflationary environment; maintain feedback loops between claims, reserving, capital modelling, and underwriting/pricing functions; consider whether the uncertainty around claims inflation has been adequately allowed for in the capital requirement; and ensure that risk management systems continue to be effective.
Meanwhile, Shah also said in the letter: “For managing agents operating in the Lloyd’s market, we draw your attention to a letter on inflation published by the Society of Lloyd’s which should be read in conjunction with this letter. We encourage managing agents to consider these points when setting the reserves and calculating the capital requirements for syndicates.
“We are continuing to monitor and review how firms are preparing for and allowing for claims inflation in their reserves, claims, capital requirements, and underwriting/pricing. We would encourage all firms to review our findings and consider how each of the points may impact their firm during the year-end reserving and capital assessment process.”