Inflation poses ‘greatest risk’ to Irish insurers’ profits, Central Bank says

Rising labour and material costs currently pose the greatest risk to the profitability of Irish general insurers, the governor of the Central Bank said on Thursday.

Speaking at lobby group Insurance Ireland’s annual industry lunch, Gabriel Makhlouf noted that higher rates of inflation were already affecting the cost of settling some non-life claims on motor and property policies.

“The impact of inflation on liability policies presents the greatest risk to profitability levels as claims may be settled many years after the premiums are paid,” he said.

However, he said that the adverse impact of inflation on some firms and on insurance costs may be mitigated in part by the positive effects of rising market interest rates on investment income. General insurers typically invest most of their portfolios in corporate or government bonds, where newly invested money now commands higher rates than six months ago.

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The yield on Ireland’s 10-year government bonds, for example, has spiralled to 2.55 per cent from 0.15 per cent over the past six months as investors price in expected European Central Bank rate hikes to rein in inflation.

Mr Makhlouf indicated that declining personal injury awards, resulting from new judicial guidelines brought in last year, should also help to offset the impact of general inflation. Earlier this month, the High Court dismissed a landmark challenge to the constitutionality of the guidelines, which had led to a 42 per cent drop in Personal Injuries Assessment Board awards between April and December last year.

Meanwhile, the governor said that he expects insurers to be “working hard” to be ready for the upcoming July 1st implementation of a regulatory ban on a widespread practice of “price walking”, where motor and home insurers increase premiums for loyal customers by stealth.

This means that insurers cannot charge personal consumers who are on their second or subsequent renewal a premium that is higher than what they would have charged them if they were on their first renewal.