2022_Inflation_Impact_Report_-

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Business & Economics
Finance
The Return of Inflation: 
Implications for the 
Economy & Insurance
June 2022
Over the past several years, businesses have faced a seemingly never‑ending 
series of challenges including a global pandemic and resulting economic 
shutdown, record natural catastrophes and a hardening insurance market. 
By mid‑2021, the worst appeared to be over; vaccination rates were on 
the rise, the economy was expanding and insurance rate increases were 
leveling off.
Any optimism, however, may have been premature as inflation quickly rose to levels not seen in over 40 years. This 
threatens the economy overall and will have a profound effect on insurance. Ultimately, rising inflation could be a 
more significant event for the insurance industry than the pandemic.
It is important to note that most industry actuaries, underwriters, claim professionals and risk management 
professionals have never experienced severe inflation. Memories of its destructive power have faded and will have 
to be revisited. Insurers and insurance buyers will need to adjust their approaches to address those potential 
impacts on everything from pricing to limits adequacy.
“What we learn from 
history is that people don’t 
learn from history.”
–Warren Buffet
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The Return of Inflation
Why inflation matters
In any economy, prices for individual goods and services are in a constant 
state of change. Inflation measures the overall impact of price changes 
for a broad, diversified set of products and services. A prolonged increase 
reduces the purchasing power of the currency and ultimately leads to a 
slowdown in economic growth.
The U.S. represents the world’s single largest economy, with a GDP of $23 
trillion in 2021 — accounting for more than one-fifth of global output. 
Since the U.S. dollar is the most widely used currency in global trade and 
transactions, even small changes in U.S. monetary policy and investor 
sentiment can play a major role in driving global financing conditions.
As the United States’ central bank, the Federal Reserve plays an 
important role in managing the U.S. economy. The Fed has two main 
objectives: to minimize unemployment and to maintain price stability.
This dual mandate is predicated on a perceived tradeoff between 
inflation and unemployment called the Phillips Curve. In the 1950s, 
economist William Phillips theorized that lower unemployment increases 
the demand for labor and leads to higher wages, which are ultimately 
passed along in the form of higher prices for goods and services. 
Conversely, rising unemployment would lower both wages and prices.
Although the Phillips Curve remains a cornerstone in Fed policy, 
many economists believe that fundamental changes in the labor 
market, global trade, technology and fiscal policy have weakened this 
traditional link. For example, a decline in union participation beginning 
in the second half of the 20th century reduced workers’ bargaining 
power, even as unemployment fell. Similarly, improved productivity, 
globalized supply chains, improved pricing transparency and an 
accommodative monetary policy helped stabilize and anchor inflationary 
expectations at 2%.
Since 1990, U.S. inflation has been remarkably stable, despite 
fluctuations in unemployment. At the midpoint of 2022, however, a tight 
labor market has seen unemployment fall below 4%, and wages have 
risen 5.5% year over year. While this may lead some to conclude that the 
Phillips Curve is still alive and well, the real inflationary drivers are far 
more complicated. Ultimately, this makes the Fed’s task in managing 
and controlling inflation more complex.
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Inflation is generally measured using one of several different metrics, including the Bureau of Labor Statistics’ 
Consumer Price Index (CPI), which measures the average change in the prices paid for a “market basket” of 
goods and services. Some economists, including those at the Fed, prefer “core CPI,” which excludes food and 
energy prices.
Because prices for these products can be highly volatile, excluding them makes it (theoretically) easier to 
determine what is truly going on in the economy. However, reliance on core CPI ignores two critical categories 
that account for a significant share of most household budgets.
For over 30 years, the U.S. enjoyed a remarkable run of low inflation, despite fluctuations in unemployment. 
Between November 2020 and November 2021, however, the CPI steadily rose to 6.8%. The Fed noted the increase 
but took the view that it was supply chain-related and “transitory” — that inflation would slowly trend down 
as consumers exhausted their savings, supply chains were reestablished and demand transitioned from goods 
to services.
FIGURE 1: THE CONSUMER PRICE INDEX HAS SKYROCKETED IN THE FIRST FEW MONTHS OF 2022.
Source: Bureau of Labor Statistics
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Apr-02Dec-02Aug-03Apr-04Dec-04Aug-05Apr-06Dec-06Aug-07Apr-08Dec-08Aug-09Apr-10Dec-10Aug-11Apr-12Dec-12Aug-13Apr-14Dec-14Aug-15Apr-16Dec-16Aug-17Apr-18Dec-18Aug-19Apr-20Dec-20Aug-21Apr-224
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The Return of Inflation
Despite concerns, the Fed maintained an accommodative monetary policy, through low interest rates and active 
intervention in the bond market. As the CPI continued to move higher through the end of 2021, Fed chairman 
Jerome Powell redefined “transitory” to mean that inflation wouldn’t cause “permanent harm.” He also 
announced the Fed’s intent to begin raising interest rates and reducing its $9 trillion balance sheet of Treasury 
and mortgage bonds. Reducing such holdings will have the effect of further raising loan costs.
At its March meeting, the Federal Open Market Committee raised the target range for the Federal Funds rate by 
25 basis points and predicted up to 11 more increases before the end of 2023.
By the end of March, inflation had risen to 8.55% — the highest level in 40 years. This rekindled painful memories 
of the 1970s’ “stagflation” and put pressure on the Fed to take stronger action.
In May, the bank raised the benchmark rate by 50 basis points — its most aggressive increase since 2000 — 
with the Fed signaling that it was prepared to take whatever steps necessary to bring inflation under control. 
Quantitative tightening will also begin June 1, as the Fed allows bond holdings to mature rather than 
replacing them.
In April, the CPI slowed to 8.3%, although year-over-year energy prices increased 30% and food prices rose nearly 
10%. Costs also continued to increase for both shelter and new cars. Even after removing volatile food and energy 
prices, core CPI still rose 6.2%, clouding hopes that inflation had peaked. These trends also indicate that prices 
are unlikely to return to pre-pandemic levels any time soon.
To lower inflation, the Fed’s goal is to reduce consumer spending by increasing borrowing costs — cooling the 
economy, but not enough to tip it into a recession. Powell has stated that he wants to quickly raise rates to a new 
equilibrium that neither stimulates nor restricts economic growth.
Most policymakers believe this will move rates to somewhere between 2.8% and 3% by next year, slowing demand 
for houses, autos, home repairs and other expensive items. This will be a delicate balancing act, as rising interest 
rates can also undermine consumer confidence and reduce employment.
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The Return of Inflation
What is driving inflation?
Although it is tempting to compare recent trends to the 1970s, the factors driving today’s inflation are 
fundamentally different. In many respects they are also more complex, intertwined and challenging to resolve. 
Important considerations include:
 • FISCAL POLICY: By April 2020 — just weeks into the pandemic — large swaths of the economy were shut 
down and unemployment in the U.S. spiked to 14.7%. Federal stimulus programs injected $6.7 trillion into 
the economy, and the Fed took steps to maintain capital markets, keeping interest rates extremely low and 
purchasing large amounts of debt securities. Meanwhile, American consumers’ excess savings increased from 
$64 billion in March 2020 to $2.2 trillion a year later. While COVID-19 relief was necessary, some economists 
believe it should have stopped earlier. By the time the American Rescue Act was passed in March 2021, the 
economic recovery was already well underway, and additional stimulus only added to the monetary supply. As 
the economy reopened in 2021, pent-up consumer demand met a supply chain still in disarray and unable to 
keep up.
 • EMPLOYMENT: Unemployment rates fell to 3.6% in April 2022, but millions of workers have elected to 
retire, leave the workforce, switch jobs or start their own businesses. Job switching is also at an all-time high, 
while remote work has weakened traditional employer/employee bonds. A record number of unfilled job 
openings — 11.5 million as of March 2022 — has created a structural imbalance, fueling an unprecedented 
war for talent. In response, average wages are rising quickly and may go even higher as businesses attempt 
to poach talent and/or draw workers off the sidelines, leading to a potential inflation “wage spiral” where 
higher payrolls and price increases continually drive each other higher.
 • ENERGY PRICES: Demand for coal, oil and gas has increased sharply as the global economy has rebounded, 
but reductions in hydrocarbon production have made it difficult for suppliers to respond. The ongoing 
conflict between Russia and Ukraine — and uncertainty about its duration — has created further instability in 
the form of supply issues and oil prices north of $100 a barrel. Escalating energy prices in China have also led 
to constraints on the use of electricity, leading to production slowdowns and higher prices for commodities 
and parts.
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The Return of Inflation
 • ZERO COVID-19: China remains the world’s manufacturing engine, but has been hampered by the spread of 
the omicron coronavirus variant in 2022. This spring, the Chinese government aggressively reimplemented 
its “Zero COVID” policy, which aims to reduce infection and death rates to near-zero by shutting down cities 
and towns until the risk of infection has passed. Efforts to reopen factories have been complicated by rolling 
infections — and those that have reopened must follow a set of complicated and expensive pandemic-control 
measures. The global supply chain disruptions have been enormous, impacting everything from automobile 
manufacturing to electronics to semiconductors. Lockdowns have further snarled Chinese ports and 
transportation, stalling nearly 500 bulk cargo ships in Shanghai alone as of mid-April and causing additional 
shortages around the world.
 • WAR IN UKRAINE: Ukraine and Russia account for 30% of the global wheat trade and disruptions are already 
pushing food prices higher. Russia is also a key source for certain metals and minerals essential to global 
manufacturing. Those countries neighboring the conflict will face disruptions to trade, supply chains and 
shipping routes. And although China remains committed to maintaining strong ties to Russia, increased 
geopolitical tension can reduce investor confidence and may lead to political realignment and the weakening 
of global trade. Many U.S. companies are already pivoting to onshoring or “nearshoring” supply chains to 
minimize future disruptions.
 • CHIP SHORTAGES: Demand for semiconductor chips — critical to mobile phones, laptops, games, automobiles 
and more — increased 17% from 2019 to 2021, and is expected to only grow in the years ahead. The 
combination of surging demand and pandemic-related disruptions in production has led to shortages and 
skyrocketing prices over the past two years. Semiconductor fabrication plants are also operating at near-total 
capacity, with little immediate ability to increase output. Geopolitical considerations are also a factor, with 
the U.S. restrictions of semiconductor sales to Huawei Technologies, ZTE and other Chinese firms leading to 
stockpiling and driving prices even higher. Although bottlenecks are expected to ease by the end of the year, 
most experts do not see shortages resolving before 2024.
 • TRANSPORTATION: Simply getting supplies and finished goods from one point to another has also become 
increasingly difficult. The ports of Los Angeles and Long Beach, which receive 40% of all goods shipped to 
the U.S., saw unprecedented backlogs in late 2021, driven in part by a significant shortage of truck drivers. 
Although this congestion has eased somewhat, the improvement has more to do with ships diverting to other 
ports and production slowdowns in China. Escalating vessel backlogs along the East Coast point to continued 
challenges. Ships also can’t unload quickly because terminals are already full of containers and warehouses 
near the ports are short workers, storage space and drivers.
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The Return of Inflation
The outlook for 2022 & beyond
Despite significant imbalances in supply and demand, the U.S. economy remains relatively stable in terms of both 
growth and unemployment. The consensus outlook for GDP growth in 2022 remains at 2.75% and demand should 
begin to slow as consumers face higher borrowing rates.
Some experts, however, are warning that the chances of a recession are growing. In March, Goldman Sachs 
cut its forecast for fourth-quarter growth in 2022 to 1.75% and pegged the chances of a recession in the next 
year at between 20% and 35%. Stocks have also faced steep declines in recent months with the S&P 500 down 
13% and the Dow Jones Industrial Average down 9% through the first five months of 2022, a sign of negative 
investor sentiment.
FIGURE 2: THE S&P 500 & DOW HAVE FALLEN IN 2022.
3,500
3,700
3,900
4,100
4,300
4,500
4,700
4,900
30,000
31,000
32,000
33,000
34,000
35,000
36,000
37,000
38,000
12/31/2101/07/2201/14/2201/21/2201/28/2202/04/2202/11/2202/18/2202/25/2203/04/2203/11/2203/18/2203/25/2204/01/2204/08/2204/15/2204/22/2204/29/2205/06/2205/13/2205/20/2205/27/2206/03/22DJIA
S&P 500
05/31/22Source: Google Finance/Morningstar
Even a partial resolution of global supply chain issues would reduce pressure on the Fed to continue aggressively 
raising interest rates. A resurgence of COVID-19, however, could exacerbate supply chain issues and push inflation 
even higher. Moreover, the factors driving inflation are varied, complicated and, to some degree, beyond the 
control of the U.S. government.
For now, the best course of action for both insurers and buyers is to address the likelihood of inflation remaining 
elevated for the foreseeable future.
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The Return of Inflation
Inflation’s effects on insurance
The property and casualty insurance industry entered 2022 in a position 
of strength, with record levels of surplus. Although interest rates remained 
near historical lows, the industry saw net written premium rebound as the 
economy continued to expand.
Insurers had also largely repositioned their books, adjusting retentions, attachment points and deployed limits. 
Strict discipline around risk selection, pricing and terms had led to improved combined ratios and earnings.
Inflation is not a new phenomenon for the insurance industry. Claim costs have been rising steadily for some 
time as a result of climate change, social inflation and rapid advances in technology. As an example, the modern 
automobile has become heavily dependent upon technology and specialized labor, making a car far more costly to 
repair in 2021 than in 1991. Similarly, natural catastrophe losses have become more extreme and less predictable, 
with average annual losses over the last decade now exceeding $70 billion.
Traditionally, insurers have managed this upward pressure through a combination of risk selection, changes 
in program design and premium increases. The current inflationary outlook, however, is far more complex and 
presents both challenges and opportunity for the industry. Relevant considerations include:
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The Return of Inflation
EXPOSURES: Across myriad industries, supply chain and macroeconomic challenges are increasing the cost of 
lumber, energy, commodities and labor. These increases contribute to higher wages, vehicle repair costs and 
building replacement values. Having already absorbed a significant run-up in premiums, insureds now face the 
potential for rate increases to be amplified by exposure changes. It will be critical to distinguish between real 
and nominal changes in exposure: Are payrolls or sales going up because of increased risk or simply because 
of inflationary pressure?
For example, if a restaurant’s sales went from $15 million in 2020 to $20 million in 2021 because of the cost of 
inputs, an underwriter might argue that sales went up by 33%. Yet, the underlying risk would only change if the 
restaurant had more customers, added new locations or sold more meals. Similarly, payroll should be looked at in 
conjunction with total hours worked or number of employees. Being ready to explain and quantify the difference 
in exposures is critical to success.
Insureds may face an even more significant challenge as respects building replacement values. The “replacement 
cost” for a given asset should align with what the insured would incur to rebuild or replace the building with 
materials of like kind and quality. These valuations depend on current and accurate estimates of prices for 
lumber, steel, cement, labor and other construction materials.
Although commodity prices and labor costs are never static, replacement values reported by insureds are 
seldom updated. The net effect is an adverse impact on insurer modeling and pricing. As an example, between 
December 2020 to December 2021, the Bureau of Labor Statistics’ Producer Price Index for steel mill products 
more than doubled, while the PPIs for other building materials rose by double digits. Delivery times are also 
being extended — meaning supplies may be subject to additional freight charges — and the cost of specialized 
construction labor has risen dramatically.
FIGURE 3: THE PPI FOR STEEL & OTHER BUILDING MATERIALS ROSE SHARPLY FROM DECEMBER 2020 
TO DECEMBER 2021.
Source: Bureau of Labor Statistics
14.2%
15.6%
18.1%
19.0%
21.1%
23.4%
29.5%
35.4%
128%
Plywood
Prepared paint
Asphalt felts and coatings
Lumber
Gypsum products
Copper and brass shapes
Aluminum mill shapes
Plastic construction products
Steel mill products
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The Return of Inflation
In upcoming renewals, insureds should expect significant scrutiny, discussion and upward pressure around 
reported values. As the supply chain normalizes, it is important for insureds to understand the current pricing 
environment and cost structure and push back against inflated estimates.
Over time, inflationary pressure will slow overall economic activity, leading to reduced exposures and ultimately 
impacting insurers’ top-line revenue. Many carriers have reported double-digit growth for several quarters, and it 
is unclear how a slowing economy might impact their performance in 2022 and beyond.
INVESTMENT INCOME: U.S. P&C insurers manage approximately $2 trillion in assets. Insurers typically maintain 
highly conservative investment strategies, with bonds, fixed income instruments and cash comprising 75% of  
their portfolios.
Over the past 10+ years, a persistently low interest rate environment has led to a steady decline in investment 
income and put more pressure on underwriting profitability. In fact, at 2.9%, net investment yields on P&C assets 
in 2021 were the lowest since 1960.
FIGURE 4: P&C INSURERS’ INVESTMENT RETURNS HAVE DWINDLED OVER THE LAST 15 YEARS.
Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020-21 data from the APCIA. Risk and Uncertainty 
Management Center, Univ. of South Carolina.
As the Federal Reserve focuses on raising interest rates, yields on 10-year Treasury notes have climbed to 3%, 
presenting insurers with an opportunity to reposition their portfolios and boost investment income. This is not 
as straightforward as it may appear, since insurers generally structure investments to match expected 
payments of the loss reserves they support.
Since higher interest rates reduce the price of existing bonds, selling them to invest in higher-yielding ones may 
require an insurer to book a loss. Conversely, holding onto a lower-yielding asset while underlying losses are 
escalating due to inflation may end up impairing surplus.
4.4%
4.0%
4.6%
4.5%
4.6%
4.2%
3.9%
3.7%
3.8%
3.7%
3.4%
3.7%
3.2%
3.1%
3.1%
3.4%
3.1%
3.3%
2.9%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
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The Return of Inflation
For long-tail lines, such as workers’ compensation, higher interest rates should gradually push up the return on 
invested assets. Inflation may also impact how insurers invest, with more emphasis on variable rate instruments, 
inflation-protected securities and “recession-resistant” assets, such as real estate.
An important question is whether improved investment returns might also help insurance buyers by reducing 
pressure on the underwriting side. The industry as a whole has become more focused on underwriting profitability 
and a higher return on equity. As investment income increases, will insurers remain as disciplined or be tempted 
to relax their standards in pursuit of market share? Will higher investment returns be used to invest in new 
products or capabilities?
FIGURE 5: AS INSURERS’ INVESTMENT INCOME HAS REMAINED FLAT, UNDERWRITING PROFITABILITY 
HAS BECOME A PRIORITY.
Source: A.M. Best; billions of dollars
LIABILITIES. Insurers and insureds maintain loss reserves to pay for claims that are known and/or incurred but not 
reported (IBNR). These reserves are generally established with an assumption that inflation will not materially 
change during the life of the claim.
When inflation rates run higher, loss reserves will need to be adjusted. This may take the form of more 
conservative initial loss estimates or increased adverse development over time. Carriers are closely watching 
the impact of inflation with concerns that volatility around future payouts could have a negative impact on 
underwriting income.
$47.1
$47.6
$49.2
$48.0
$47.3
$46.2
$47.2
$46.6
$48.9
$55.3
$53.9
$53.8
$56.1
-$3.0
-$10.5
-$36.2
-$15.4
$15.2
$12.3
$8.9
-$4.7
-$23.3
-$0.2
$3.7
$5.4
-$4.1
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Net investment gains
Underwriting gains/losses
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SEVERAL RECENT TRENDS ARE WORRYING
 
• Between 2015 and 2019, nuclear verdicts and social inflation drove the median of the top 50 jury verdicts in 
the U.S. up from $28 million to $90 million, eroding carrier profitability, according to National Law Journal 
data. The property and casualty market turned sharply harder in 2019 as insurers sought to address this 
situation by modifying rates, deductibles, attachment points and limits. Although painful, these efforts led to 
dramatically improved combined ratios and net written premium. Rate increases continue across most lines, 
but the pace of those increases has slowed significantly. Nevertheless, insurers remain wary and are closely 
watching liability loss trends as courts reopen and trial activity accelerates. Higher inflation could make a 
troubling situation even worse and quickly negate any progress the industry has made.
 
•
Inflationary pressures are impacting auto physical damage claims as ongoing supply chain issues make parts, 
replacement vehicles and labor more expensive. In April 2022, used car prices were up 22.7% compared to the 
previous year while new car prices were up 13.2%.
 
• Workers’ compensation claims present unique challenges as respects benefits pegged to rising wages. 
Healthcare costs are also a major component of any claim. Although medical inflation remains low — rising 
just 3.5% from April 2021 to April 2022 — healthcare experts worry that industry wages, worker shortages and 
supply chain costs could soon lead to an escalation in pricing. This could be particularly challenging in states 
where injured workers are entitled to lifetime benefits.
This uncertainty will lead to underwriter conservatism. Some insurers are already increasing loss trend 
estimates, which may translate into a harder line on everything from pricing to loss forecasts.
Occurrence liability policies can produce losses far into the future, making them particularly vulnerable to the 
impact of social inflation. Over time, retentions will not hold quite as much loss and attachment points and 
limits may prove inadequate. Economic inflation will only accelerate this trend and lead insurers to further 
strengthen pricing.
For buyers seeking to control costs, the temptation may be to reduce limits. These short-term savings could 
ultimately have a devastating impact on policyholders’ bottom lines if loss severity continues to escalate. In fact, 
buyers that reduced limits in response to the price increases of 2019 and 2020 should revisit those decisions using 
appropriate modeling techniques.
Amid a rapid and sudden rise in inflation, it can be difficult to accurately predict estimated losses. Standard 
actuarial methods rely on past patterns to predict future costs; a sudden shift in inflation violates this assumption, 
increasing the uncertainty and ultimate cost.
In the following example, the left table illustrates how this plays out under a steady state of 3% inflation. The 
information in the triangle is known and used to estimate future payments (in gray). As shown on the right, if 
inflation jumps to 8%, future payments increase, leaving the estimates from the left table understated.
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FIGURE 6: INFLATION HAS A SIGNIFICANT EFFECT ON FUTURE LOSS DEVELOPMENT.
Steady state scenario: 3% inflation 
Inflation change scenario: 8% inflation
Source: Lockton Analytics
Insurers are keenly aware of the relationship between inflation and future loss development. A high inflation 
outlook may lead them to take a more conservative view and increase loss picks. Paired with the potential 
deterioration of insureds’ financials through rising costs and shrinking margins, these trends could lead to an 
increase in required collateral, higher borrowing costs and a reduction in available borrowing capacity.
Inflation will put upward pressure on collateral requirements as insurers adjust their expectations for reserves and 
IBNR losses. Clients will see higher borrowing costs and be required to tie up more of their capital.
Amid these headwinds, insureds can find competitive advantage through the careful use of analytic tools to 
highlight favorable trends and distinguish themselves from their industry peers. Such an approach can also help 
identify strategic opportunities to assume more risk and reduce exposure to market forces. Insurance buyers with 
large retentions can avoid unexpected earnings volatility by analyzing how inflation is being incorporated into 
accrual estimates for past and future liabilities.
Figure 6: Inflation has a significant effect on future loss development.
Steady State Scenario: 3% Inflation
Inflation Change Scenario: 8% Inflation
Months of development
Remaining
Months of development
Remaining
12
24
36
48
60
liability
12
24
36
48
60
liability
2017
100.0
200.0
280.0
336.0
369.6
0.0
2017
100.0
200.0
280.0
336.0
369.6
0.0
2018
103.0
206.0
288.4
346.1
380.7
34.6
2018
103.0
206.0
288.4
346.1
382.4
36.3
2019
106.1
212.2
297.1
356.5
392.1
95.1
2019
106.1
212.2
297.1
359.3
398.5
101.5
2020
109.3
218.5
306.0
367.2
403.9
185.3
2020
109.3
218.5
310.2
377.5
419.8
201.3
2021
112.6
225.1
315.1
378.2
416.0
303.4
2021
112.6
230.6
329.6
402.2
447.9
335.4
618.4
674.4
Source: Lockton analytics
Policy yearPolicy yearFigure 6: Inflation has a significant effect on uture loss dvelopment.
Steady State Scenario: 3% Inflation
Inflation Change Sceario: 8% Inflation
Months of develpment
Remaining
Months of develpment
Remaining
12
24
36
48
60
liability
12
24
36
48
60
liability
2017
100.0
200.0
280.0
336.0
369.6
0.0
2017
100.0
200.0
280.0
336.0
369.6
0.0
2018
103.0
206.0
288.4
346.1
380.7
34.6
2018
103.0
206.0
288.4
346.1
382.4
36.3
2019
106.1
212.2
297.1
356.5
392.1
95.1
2019
106.1
212.2
297.1
359.3
398.5
101.5
2020
109.3
218.5
306.0
367.2
403.9
185.3
2020
109.3
218.5
310.2
377.5
419.8
201.3
2021
112.6
225.1
315.1
378.2
416.0
303.4
2021
112.6
230.6
329.6
402.2
447.9
335.4
618.4
674.4
Source: Lckton analytics
Policy yearPolicy year14
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Best practices for insurance buyers
The inflationary pressures facing the economy will not be resolved quickly or easily. Fed actions will help reduce 
demand but do little in terms of supply. Faced with this reality, insurance buyers will need to think differently 
about their program design and claim management strategies. They will also have to consider whether past 
performance is still relevant as respects future trends.
There is some good news. Industry profitability has improved and should continue to do so as interest rates rise. 
Loss severity, meanwhile, has slowed for the time being as courts work through their backlogs. Surplus remains 
at record levels and competition has heated up as insurers seek to grow in this rate environment. This all creates 
opportunity for the strategic buyer.
Develop early, realistic budget expectations and ensure that their organizations’ financial leaders are 
aware of any potential impact of inflation. Budgets are often finalized long before renewal effective dates 
and expectations should be adjusted based on inflation and rate adjustments.
01
 
•
Insureds should develop alternate exposures such as “units sold” or “hours worked” to provide context for 
underwriting discussions and translate historical exposures to provide comparative data.
 
• Understand how exposure increases and/or assumptions around inflation impact carrier loss forecasts  
and collateral.
 
• Use analytics and benchmarking, including Lockton Insight, to highlight favorable trends and opportunities. 
For example, a drop in loss severity could help alleviate insurers’ concerns about the effect of inflation on 
retentions, attachments and limits.
 
• Carefully consider program minimums and cancellation clauses. Pursue minimums that offer the potential 
for return premium if audited exposures are less than expected.
Examine exposures carefully and be prepared to explain differences between nominal and real increases.
02
LOOKING AHEAD TO 2022 & BEYOND, INSURANCE BUYERS SHOULD:
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Consider adequacy of the values provided for building, contents and business interruption. In particular, 
review business interruption calculations and business continuity plans to ensure they reflect ongoing 
supply chain and inflationary pressures. Prepare to discuss these values with underwriters during the 
renewal process.
03
Evaluate how work-from-home or hybrid working models might affect employee concentrations for 
workers’ compensation. Employers that historically had a large number of employees at a single 
location may find that this is no longer the case post-COVID-19. Presenting accurate, updated 
information should reduce insurers’ catastrophe exposure and help offset inflationary pressures  
on premium.
04
 
• Be prepared for greater financial scrutiny from insurers’ credit officers.
 
• Work with actuarial consultants to highlight relevant trends that will minimize collateral. These may 
include accelerated claim closure rates, reductions in claim frequency, or the sale/divestiture of facilities or 
subsidiaries. Similarly, a change in where operations are located may also have an impact.
 
• Examine whether self-insurance or a lower deductible might help minimize go-forward collateral.
Understand the impact of higher interest rates on collateral and collateral availability.
05
 
• Accelerate claim closure efforts. With costs rising, claims will only become more expensive. 
 
• Evaluate TPA performance and claim reduction incentives. Consider whether a flat “per claim” charge might 
be more cost effective than a loss conversion factor tied to escalating losses.
 
• Evaluate the efficacy of removing legacy claims from balance sheets, as rising interest rates may make loss 
portfolio transfers more attractive.
Review historical and future accrual calculations with a third-party actuary. Do current reserves 
adequately reflect the inflationary environment? Understand whether incumbent insurers are becoming 
more conservative in their initial estimates and/or accelerating development over time.
06
 
• Consider purchasing trade credit insurance, which can help protect margins and cash flow from accounts 
receivable exposure in the event of a default. Trade credit coverage can also provide real-time insights that 
allow companies to understand the financial strength of current and potential customers.
 
• Work closely with their insurance advisors and bankruptcy counsel to craft orders necessary to facilitate 
insurance coverage and payments of premiums. Lockton’s multidisciplinary Corporate Restructuring team 
can help guide the process, answer questions and structure coverage for all parties.
Prepare for the possibility of an economic downturn and its credit implications. If the economy slows, 
concerns about liquidity and credit could return and the number of companies seeking bankruptcy 
protection could grow.
07
16
Lockton Companies
The Return of Inflation
Inflation is just one more challenge in an 
already complicated landscape. Organizations 
should work closely with their advisors to 
understand its potential effects on their 
programs and their options to mitigate them.
KC: 1596719
Use Lockton’s Dynamic Capital Modeling or EDGE P&C 
Benchmarking Insights to evaluate current deductibles, 
attachment points and limits. Rising loss severity could 
undermine the financial efficiency of deductibles and 
attachment points. Limits may also be more quickly eroded — a 
particular concern for insureds that previously reduced limits 
as the market hardened. Consider the use of buffer layers or 
corridor deductibles.
08
Joe Lowry
Risk Analyst
816.960.9304
jdlowry@lockton.com
Vincent Gaffigan
Executive Vice President
Director of Risk Consulting
314.812.3227
vgaffigan@lockton.com
Scott Johnson
FCAS
Vice President
P&C Analytics Manager
816.960.9453
scjohnson@lockton.com
AUTHORS
17
Lockton Companies