Rates ‘will need to increase’ to accommodate high inflation – Allianz Holdings

Last week (4 August 2022), the Bank of England predicted that consumer price inflation will reach 13.3% in October this year as the UK prepares to face a long-term recession – as a result, insurance rates “will need to increase throughout the second half of 2022” to accommodate this macroeconomic environment, according to Colm Holmes, chief executive of Allianz Holdings.

According to the Office for National Statistics’ July 2022 figures, the Consumer Prices Index (CPI) rose by 9.4% in the 12 months to June 2022, up from 9.1% in May.

This compares to an annual consumer price inflation rate of 5.5% back in January 2022.

Speaking exclusively to Insurance Times following the publication of Allianz Holdings’ 2022 half-year financial results on 5 August 2022, Holmes explained that for “the rest of the year, obviously our key focus is going to be on inflation and the impacts of that with regards to rate”.

He continued: “We do anticipate the need for an acceleration of rate in the second half of the year and I [will] be closely watching that to ensure that it is sufficient for what’s required.”

Financial impact

Allianz Holdings’ half-year financials have not been immune to the impact of inflation.

Holmes explained that this has had a “smallish impact on our combined operating ratio (COR)” – for 2022’s H1, Allianz Holdings reported a COR of 97.2%, compared to the 91.7% figure it recorded for the same period last year.

Other contributors to this year’s COR uptick include increased motor frequencies post-lockdown and the succession of storm events that hit the UK back in February.

“We’re very pleased with the overall performance of the business and how we’ve managed and mitigated the impacts of inflation on our books, which we had anticipated and had put into our pricing algorithms last year, but obviously the level of inflation has been higher than anticipated, which is why you’ve seen this smallish impact on our COR for the year,” Holmes added.

He noted that reserves have been particularly affected by inflation, however, on the whole, inflation’s impact on the business has been “uniform” and “across the board”.

In terms of what the insurer is doing to mitigate the effects of inflation, Holmes said: “We have a lot of fixed price contracts in terms of materials and labour, so they mitigate the impact of [inflation] in year one.

“We’re obviously focusing very hard on [the] supply chain and the benefits of being part of Allianz is our ability to source materials and rely on each other [for support].”

Although the future lofty heights of inflation are still uncertain, Holmes remains confident that Allianz Holdings will be able to weather the potential financial storms ahead.

He said: “As we rate for the impacts of inflation going forward and continue with our efforts to mitigate the impacts of inflation, we’re very confident about the rest of 2022 and into 2023.

“We do anticipate that rate will need to increase throughout the second half of 2022.

“We’re very confident that we have anticipated quite a lot of this inflation, which is why the impact on us has not been quite as large as maybe you’ve seen with [other insurers], but we do need to now start rating for inflation above what we anticipated as we go through the second half of this year and into 2023.”

Indexation concerns

Amid this inflationary landscape – which shows no sign of abating – Holmes is incredibly “worried” about “indexation risk” and “underinsurance”.

For him, this is where insurers and brokers must work closely together to support end customers who may be feeling financially squeezed.

He explained: “One of the things I worried about before [high inflation] was underinsurance in the commercial segment - I’m concerned that [this] will worsen as a result of inflation and a recession on top of that.

“We’re working very, very closely with our broker partners to ensure that our customers have the right level of protection for their businesses.

“That will offset the impact of premium rates, but obviously, that premium in itself, we can get that indexation right and ensure that people have the right level of cover for their businesses.”

A further consideration, Holmes added, is that as the UK enters “into recession, we’ve become much more aware of increases in areas such as fraud, for example”.