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The human face of inflation

  • Publish Date: Posted 15 days ago
  • Author:by Paul Jardine

Like the pandemic, the impact of inflation will be felt in many different ways, with implications for staff and the business.

Last week, Lloyd's CEO John Neal said he had written to staff announcing the Corporation would be paying staff earning less than £75,000, an extra £2,500 to help cover rising living costs.

It is a reminder that as with the recent COVID-crisis, businesses are once again navigating a challenging environment that has both an economic and very human element to it. 

The Lloyd's market's H1 results - also announced last week - revealed the market's robust underwriting performance had been overshadowed by £3.1 billion in unrealised mark-to-market losses. 

Rising interest rates contributed to an overall market loss of £1.8 billion for the first six months of the year.It is clear that inflation therefore presents wide-ranging challenges for boards and senior management teams. 

When will it peak?

We have a situation where Central Banks are raising interest rates to their highest levels in 20 years, but so far this is having very little impact.

Both the Bank of England's Monetary Policy Committee (MPC) and OECD projections have so far been widely off the mark (that's the actuary in me talking), but are at least agreed in anticipating that inflation will peak this year, reducing through 2023 and resuming normal levels from 2024 onwards.

In its August report, MPC noted that CPI inflation is expected to rise considerably more than it had forecast in May, from 9.4% in June to just over 13% in Q4, and to remain at very elevated levels throughout much of 2023.

The other day I was having a conversation with the some of the senior managers of a Lloyd's syndicate about the fact the actual inflation rate has been beyond the 95th percentile of MPC projections. Even the experts have been surprised by the fact it's still going on, as most expected it to be a very short-term hump.

For insurers - as demonstrated by the half year 2022 results - there are clear business impacts. Beyond the investment losses experienced by most carriers, there are the more uncertain impacts on the claims, underwriting and reserving side, particularly for longer-tail classes of business. 

And let's not forget that when times are tough (and we saw this in the years post GFC), the tendency to claim increases and - as an industry - we also see an increase in spurious and fraudulent activity.

A collection of counter fraud experts at the virtual Fraud Charter roundtable (6 September 2022) – hosted by Insurance Times– confirmed the industry is already beginning to see the impact of the cost of living crisis on the frequency and type of fraudulent insurance claims.

Retain your talent

Some of our previous blogs have discussed the Great Resignation (or Big Quit) and the challenges organisations face in retaining talent at a time of significant movement. If anything, this is a challenge that will be heightened by inflation, as the real value of pay declines.

Last month (August 2022), the ONS revealed that real pay had fallen by three percent over the last quarter. The cost of living is outpacing wage growth and affecting how far salaries go in the day-to-day life of workers. 

The insurance sector is a relatively buoyant industry, but at the lower rungs of our organisations are workers (who tend to be our younger professionals) who are feeling the pinch. As with the pandemic, this could have profound implications for their mental health and the ongoing adjustment to life and work in the post pandemic environment.

COVID affected not just our business operations, claims and how we thought about policy wordings and definitions, but also our colleagues and their families. Inflation is another disruption that is more comprehensive in its impact across organisations, because it touches almost everything.

I have sons in their early 30s who have never known inflation in their adult lives. If you've never experienced it, how do you educate your colleagues about managing through high inflationary times? How and where do you react to the stresses and strains that high inflation will inevitably bring?

There are no easy answers, but Lloyd's has shown one way of responding. 

Earlier this year the BoE governor Andrew Bailey urged companies to exercise pay restraint, suggesting workers should not ask for big pay rises to help control inflation.His comments were met with derision from industry bodies, unions and Number 10 Downing Street. And with good reason. 

We all hope that inflation will be a relatively short-lived challenge, but it is incumbent upon organisations to redistribute salary rises to the bottom end of their workforce. It is essential that we focus on both the human and business impact inflation creates in order to weather yet another storm.