Insurance CFOs reveal what keeps them up at night

Moody’s deep dive into what keeps chief financial officers up at night revealed providers are changing their investment plans and use of excess capital in response to rising rates and market volatility.

The poll showed the executives in charge of insurance provider’s purse strings ranked high inflation as their greatest concern for 2023, with 73% placing it among their top three worries.

Most CFOs told Moody’s they expect inflation to feed through into higher claims costs in 2023, although most expressed confidence price increases would offset or outweigh higher claims.

CFOs were most concerned about price rises falling short of claims inflation in general liability lines, but expected stronger pricing in specialty and commercial lines.

Two-thirds of CFOs ranked low economic growth as their second most pressing concern, followed by market volatility, cited by half of respondents.

Still, 41% anticipate high single or double-digit growth in their operating results.

CFOs told Moody’s they were optimistic about the industry’s prospects and expected stronger investment results and new business growth, particularly in non-life business lines, which would support their earnings.

The results of the survey reflected comments made by Aviva bosses when they published financial figures for 2022 earlier this month.

Jane Poole, chief financial officer of Aviva UK GI, said the UK business has a “very dynamic” approach to pricing, but has so far this year has been “cautious” so it can keep “on the front foot” in order to rate well in the face of inflation.

Insurers adjusting investment plans

As the Prudential Regulation Authority looks to replace Solvency II requirements and deliver the Brexit dividend demanded by the government, Moody’s survey of CFOs also found higher rates and economic headwinds have reduced respondents’ appetite for higher-risk investments.

Most CFOs said they expect their exposure to these assets to remain stable. Compared with Moody’s previous surveys, more financial chiefs plan to reduce their real estate investments.

At the same time, more insurers expect to increase their allocation to BAA-rated bonds while reducing their sub investment grade exposures.

Half of respondents said they plan to deploy excess capital in 2023, up from 29% in the last survey, reflecting improved solvency as a result of rising rates.

CFOs revealed in the year ahead they intend to channel the surplus into new business or distribution capabilities, rather than merger and acquisition activity and/or to return capital to investors.

The CFOs told Moody’s they plan no debt issuance in excess of refinancing needs, reflecting higher rates and a big rise in leverage metrics in 2022.

The survey saw CFOs recognise high consumer price inflation fuelled a significant increase in insurance claims during 2022, driven by the rising cost of construction materials and spare car parts, as well as higher used vehicle prices.

Claims frequencies also returned to more normal levels after a pandemic-induced decline: 78% of CFOs polled by Moody’s anticipate a further increase in claims inflation in 2023, despite the expected slowdown in consumer price growth.

However, the survey suggested that most insurers expect to be able to raise prices sufficiently to counterbalance or outweigh rising claims in their main business segments.

Earlier this month Jon Greenwood, acting CEO of Direct Line Group after former CEO Penny James stepped down, said his business was among those that had taken pricing actions that will support restoration of margins in motor and mitigate the impact of further claims inflation.

His comments came after Direct Line’s share price plummeted when James kicked off 2023 by announcing the insurer wouldn’t issue a final dividend for 2022 due to a significant increase in claims following the prolonged period of severe cold weather in December.

While responses on the steps being taken across the industry to avoid what happened to Direct Line vary by business line and geography, on average Moody’s survey shows around half of the CFOs expect price increases in line with claims inflation, and one third expect price rises in excess of claims inflation.

CFOs were most concerned about rate increases falling short of claims inflation in general liability lines. According to Moody’s this reflects increased competition, fuelled in part by growing capacity from US and Bermudian players.

In addition, Moody’s stated rising interest rates will gradually improve investment returns, which increases the risk of insurers relaxing their pricing discipline.

CFOs revealed they were most optimistic of their ability to raise prices by more than the increase in claims in specialty insurance lines (50%), followed by P&C commercial lines (38%).

According to Moody’s this likely reflects insurers' efforts to pass on recent strong increases in the price of specialty and commercial reinsurance.

Moody's snapshot of CFOs concerns about claims inflation came after McKinsey recommended a three-step approach that includes transparent tracking as well as various tactical and strategic actions.

McKinsey recommended insurers wishing to do well financially this year need to track claims inflation at a granular level, identify tactics for immediate impact toto mitigate the loss ratio increase plus implement certain steps to counter long-term inflation effects.