Claims inflation is having a significant impact on general insurance loss settlements, according to a recent PRA review.
The review, which covers the general insurance sector, raises concerns that a sustained rise in claims inflation could lead to a significant deterioration in solvency coverage for firms if appropriate mitigating actions are not taken.
Claims inflation has varying effects on different firms when considering their business models and risk profiles.
As part of the review, the PRA held discussions with the representatives from the London Market along with retail and commercial insurers, to understand what steps these organisations are taking to tackle claims inflation.
According to various news reports, the PRA is interested in how these firms identify drivers of claims and their expectations on future inflation.
To successfully manage claims inflation, the review noted, requires robust monitoring of the wider economy. In particular, understanding how inflation can be passed on in the form of higher settlement costs and compensatory settlements.
Scenario analysis can play a role here, as firms that are modelling changes in the economy will be best placed to respond to emerging trends in claims inflation.
The review also stresses that there needs to be regular communication and discussion of the outputs from this analysis across all departments within the organisation.