November 2023 – Insurers Pay The (Inflated) Cost to be The Boss

PriSim recently held a virtual Open House featuring business simulations for the insurance industry.  One of the discussion topics was how hard the insurance industry has been hit by inflation.

Insurance companies sometimes get a bad rap for their profitability, but inflation is adding pressure to claims expenses and increasing the cost of repairs, litigation, and jury awards (“social inflation”).  Add to that more frequent natural catastrophes and insurers just can’t seem to get a break – in prices nor in their combined ratios (incurred losses as a percent of earned premiums plus underwriting expenses as a percent of written premiums – see PriSim’s glossary of insurance terms).

Insurance companies are paid to manage and cover risks, but even in the best-case scenario they don’t always get it right; to paraphrase physicist Niels Bohr once again, “Predictions are hard to make – especially about the future.”  In PriSim’s insurance-industry business simulations, participants offset risk by making coverage, reinsurance, and pricing decisions – and yet still encounter unexpected challenges and catastrophes delivered through our Disruptor Engine™.

If inflation, hailstorms, and hurricanes are deflating your expectations of insurers, remember that every (thunder) cloud has a silver lining.  The catastrophe bond market, an alternative approach that insurers use to manage extreme risks, is forecasted to double in five years – even while covering more and more risky events.