Navigating uncertainty amidst inflation: implications for captives

In the wake of surging inflation rates, captives must exercise vigilant cost management strategies. This was the central message of a panel discussion titled 'Impact of Inflation on Your Captive’, which took place at the Vermont Captive Insurance Association (VCIA) annual conference.

The panel featured Derek Freihaut, Principal and Consulting Actuary at Pinnacle Actuarial Resources, and Dan Youngs, President of Sustainable Assurance Company.

The panel noted that historically high inflation levels have posed significant challenges for consumers and businesses alike, with lingering effects projected in the foreseeable future. In particular, insurers face mounting pressures due to elevated claims payments resulting from rising costs of goods and labour, supply chain disruptions, and delayed claim closures.

Despite the rapid decrease in inflation rates, the year 2022 witnessed negative returns from US Treasury bills, impacting captive capital positions when combined with other factors. While 2023 has demonstrated improvement, captives need to maintain a vigilant stance.

The panel highlighted the unique challenges of underwriting in an inflationary environment, as actuarial models historically relied on relatively stable inflation levels. Therefore, actuaries must adapt to the complex interplay between inflation and risk management. The panel underscored the importance of transparent communication between captives and actuaries to address emerging pain points.

Ultimately, captives are urged to monitor the evolving impact of inflation carefully, considering its implications on risk management, pricing, and general market dynamics. As the year progresses, these factors might contribute to a challenging renewal period for captives.