Recent commodity price spikes amid the low interest rate environment and dwindling investment returns have pushed inflation concerns to the top of insurance companies' risk agendas, according to Swiss Re (RUKN.VX).
Low interest rates reduce what insurers can earn from investments to meet payouts and they push up the assumed future cost of liabilities.
But insurers can limit the impact of inflation on investment returns, asset valuations and future liabilities by using inflation hedges, adding index clauses to contracts and buying more reinsurance, the world's second-biggest reinsurer said.
"On the asset side, insurers can invest in commodities, real estate and inflation-indexed bonds, which we find to be the most viable inflation hedges," David Laster, one of the report's authors, said in a statement on Tuesday.
"These investments have performed well during periods of high inflation," he said.
Low interest rates had lasted longer than anticipated, hitting insurers' investment returns, and could persist even longer in Europe, meaning insurance companies would have to make their profits from underwriting, not investing.
"Insurers can mitigate the impact by adjusting premium rates, but sometimes that is not possible if regulation or the competitive environment do not allow for such adjustments," said Thomas Holzheu, another author of Swiss Re's study.
Insurers can modify insurance contracts to shorten the tail of business or buy more reinsurance to protect against inflation surprises, said Swiss Re, adding that reinsurance is particularly helpful in emerging markets, where the risk of high inflation is greatest....MORE