Insurers must rigorously assess the impact on their solvency of the rising cost of settling car, property and other claims and ensure they have sufficient reserves, the Bank of England told the sector on Friday.
The BoE said that claims inflation due to factors such as rising wage, medical and raw materials costs is expected to affect all general insurers.
“There is a risk that persistently elevated claims inflation might result in a material deterioration of solvency coverage for some firms unless they take appropriate mitigating actions,” the Bank of England said in a letter to chief actuaries of general insurers.
“Technical provisions must be calculated based on up-to-date, credible information, and realistic assumptions. Therefore, claims inflation should be robustly considered.”
The BoE anticipates that 2023 year-end will be more challenging for reserving teams at insurers.
Firms should be mindful of this when undertaking their mid-year reserving exercise, along with capital and business planning for 2024 later this year, BoE said, adding that it may check with firms how they have considered these issues.
“Underestimating future claims inflation assumptions can have a significant effect on the representation of a firm’s financial strength,” it said.