The inflation risk in the insurance industry -

Abstract

Inflation is a very important factor which affects the whole sectors of an economy. It is a rise in the general level of prices of goods and services in an economy over a period of time. Different ways are used to calculate this rise. Causes and effects of inflation on the macro-economy are discussed. An important sector affected by inflation fluctuations is the insurance industry. Different aspects of the inflation risk are considered. Inflation affects the total return of an insurance company by impacting both underwriting and investment returns. Inflation affects non-life and life insurers differently. After examining the different effects of inflation on the insurance industry, it is important to look at the different strategies each company follows to minimize this risk. Insurance companies will tend to adjust their rates, include special clauses and change their investment strategies to protect themselves against the risk inflation presents. Estimating future inflation is also necessary for insurers to be able to reduce the impact of inflation on their returns. After a general introduction in chapter I, chapter II discusses the effects of inflation on the macro-economy. Chapter III then examines the relationship between inflation and the insurance industry. Chapter IV presents some risk mitigating strategies and a model used by insurers to estimate future inflation. Chapter V concludes the project.