Effect of Inflation on Insurance-linked Investment Performance

2022 saw the emergence of a dramatic spiral of inflationary pressure which has impacted all developed markets. In response, all major central banks responded by sharply tightening monetary conditions, both in the sense of ratcheting up base rates and beginning to wind down the extraordinary bond buying and other forms of monetary stimulus that propelled the rapid post-Covid recovery. The pace and scale of this shift can hardly be overemphasized, as the chart below sourced from the Financial Times makes clear.

Given the elevated and potentially structurally entrenched higher rates of inflation seen today, we set out to analyze the impact this could have on the potential returns of insurance-linked securities (ILS) as a specific asset class. We conducted a study based on historical data for the US insurance market from 2010 to 2021 and found that the structure of the instruments is critical to answering this question.

Read more to discover our findings!