Future inflation may damage reinsurers’ profitability on all lines of business, with casualty lines of business likely to be hardest hit, according to Towers Perrin, the world’s fourth largest reinsurance intermediary.

Towers Perrin has estimated that the impact of an inflation rate of 3 percent would be that claims that cost $1 million today would cost a reinsurer $1.113 million on average, 111% of today’s claim size.  Five percent inflation could result in a claim of $1.195 million, 119% of the original claim size.

Inflation doesn’t just impact claim severity. It can also have a knock-on effect on frequency. Periods of high inflation generally correspond with greater numbers of claims.  Looking at historical loss ratios for casualty lines, the impact of inflation can be clearly seen with a two-year lag.  An inflation high point in the US of 3.4 percent in 2000 was followed by a loss ratio of 99 percent on casualty lines in 2002.  Conversely, a 2002 low point of 1.6 percent saw loss ratios fall to 73 percent in 2004.