Fitch Ratings says insurers’ underwriting earnings over the next few years are likely to weaken in the face of “persistent” inflation, pointing out increasing premium rates to offset rising claims costs will be difficult in a slowing economy.

The rating agency released a report today, projecting underwriting margins for Australian insurers will deteriorate by 4-5 percentage points, slightly worse than in other regional markets such as Japan where a 2-3 percentage point decline is expected.

“We expect accelerating inflation to squeeze the underwriting margins for Australian non-life insurers,” Fitch Ratings Director Kanishka de Silva told insuranceNEWS.com.au.

“Higher motor spare part costs and rising building material and labour costs - as already evident in Australia - will add to claim costs which have been on the rise due to extreme weather-related losses.

“At the same time, pressure on affordability will mean that insurers may not be able fully pass on the higher claim costs, without a drop in business retention.”

Fitch provided its Asia Pacific industry outlook as the Reserve Bank of Australia (RBA) announced this afternoon another interest rate hike to tame inflation. The RBA’s latest move to raise the cash rate by 50 basis points to 2.35% - a seven-year high – marks the fifth straight month of monetary policy tightening by the central bank.

“Rising claims from a prolonged high CPI will have the greatest effect on non-life insurers’ financial performance and earnings, and reserve adequacy rating drivers, while weakness in capitalisation and leverage drivers could emerge in more severe cases,” the report says.

“The ability to re-price policies appropriately will diminish on increased competition, falling insurance coverage affordability and political headwinds.”

Fitch says its economic scenario assumes that non-life insurers and reinsurers will only be able to pass on 80% of claim inflation to their clients over the 2022-2024 period.

“As a result, underwriting margins will deteriorate by approximately… 4pp-5pp in [markets such as South Korea and Australia,” the report says, adding “the underwriting performance of non-life insurers in Australia… is likely to deteriorate in the face of faster inflation.”

Fitch predicts inflation this year for Australia will be about 8% and next year will be lower, at 4.5%.

The rating agency says supply disruptions due to pandemic-related restrictions have driven up repair and rebuilding costs, leading to higher claims for insurers in the region, especially in Australia.

“This is evident in Australia, which has also been burdened with above-average catastrophe losses and rising reinsurance costs,” the report says.