Lloyd’s of London will collect information on inflation’s impact on reserving

Lloyd’s of London has said that it is now collecting information on the impact of inflation on reserving, to ensure underwriters, members and syndicates are accounting for the current global macro-economic environment.

Lloyd’s has said that it would request information, for reporting from Q2 2022, on loses resulting from Ukraine, Covid-19, and inflation allowances in reserving, all of which will be collected in an Excel template.

Lloyd’s wrote in the note:

We expect Syndicates to be explicitly considering and making appropriate allowances within the best estimate reserves for the changes in the inflationary environment. Considerations of economic and excess inflation (including social inflation) should be made at class of business level rather than broad brush at whole account level.

Allowances should be informed by assessment of the drivers of claims costs, acknowledging that simply applying economic indices is unlikely to be appropriate since it could over-estimate (where inflation is already captured to an extent in existing reserving methods and/or economic indices are not reflective of claims cost increases) or under-estimate (where excess inflation also increases claims costs) the impact on reserves.

Around inflation, Lloyd’s said it was asking for information on inflation within best estimate reserving, given that there is significant uncertainty in how inflation will play out over the short- and medium-term.

This recent change in macroeconomic environment is likely not adequately captured in the observed historical claims data and as a result traditional actuarial triangulation projection techniques may not appropriately allow for this as part of the typical reserve setting process.

It went on: “We expect syndicates to explicitly consider economic and excess inflation (including social inflation) in their reserving process when setting best estimate reserves. Inflation assumptions should be set in a way that considers class of business as well as geography, is consistent with other areas of the business and is subject to appropriate review and challenge by the managing agent board.”

Where syndicates are not making an explicit additional allowance in their best estimate reserves for inflation, they must be able to explain why their approach is appropriate and how they have gained sufficient comfort that their reserves are adequate.

by Nataly Kramer