Radar | Dec 19,2021
Aug 20 , 2022
By Asseged G. Medhin
For decades, inflation was insignificant, especially in the developed world. In some countries, the economy was actually at risk of deflation, necessitating negative interest rates. Things have changed now, both in developing countries like Ethiopia and in the developed world.
Among the economic factors that affect the financial sector, inflation is near the top. For insurers, inflation is difficult to price both named and unnamed perils, let alone its multiple impacts on loaded claims of the insured. As a result, it is necessary for them to pay close attention to movements in interest rates. Central banks are currently hiking interest rates targeting price stability over economic growth. The hope is to ward off stagflation. For insurers, rising interest rates are good news as investment returns set to improve.
This does not mean that all is well, though. As the price of goods and services soars, companies are increasingly getting pummeled by rising human resource, input, and logistics costs, putting tremendous pressure on the bottom line. In the case of insurance companies, especially in claims management, inflation poses a major risk. Company leaders should review all costs with detailed analysis.
For insurers, the main inflation impact will show in rising claims costs, more in non-life than life insurance in which policy benefits are defined at inception. Motor and liability lines of business will likely be most immediately impacted. Accident and motor and general liability will also be affected, with inflation feeding into bodily injury claims. The key here is the time value of money. Insurance coverage likely to be claimed early will be more costly than the likes of life insurance, which are claimed much later.
The Ethiopian financial sector is unique in many regards, where one finds lucrative profit in a higher inflationary economy while interest rates are defiantly much lower. During periods of financial turbulence, creating a pricing strategy is mandatory: executives should take it as a daily assignment since it is the longest lever they can pull when driving profitability. Yet, so many firms have underinvested in it. Most products and services have their own costs, competition, and value to customers and require unique optimal pricing tactics.
The management should establish a team that analyses the company’s costs to determine where inflation is exerting the heaviest pressure. Companies must establish a baseline of the impact on cost pressure on margins and use that as a floor for formulating price targets.
Insurers' book of claims recovery and claims processing time, unlike reinsurers who works in the most advanced market, which adjusts impact of inflation, demands revision before wrongly declaring gross profit.
The other essential strategy to adjust the impact of inflation is settling claims promptly, not spreading price or increasing premiums on all insurance products. The public, existing and potential customers are in budget constrain and thus the gross written premium will go down. Increasing costs for customers under such circumstances not only breeds mistrust and leaves customers frustrated but almost ensures that future price hikes will not be taken seriously. Especially for the insurance sector, which highly demands building trust with the customer, operating with price shall be carefully handled in an inflationary situation.
Many companies are angling for larger price increases owing to inflation, much to the irritation of customers. The key is to demonstrate to salespeople that customers are not paying more for the same product or service; a sale has many facets, each potentially offering value for the customer and revenue for the company. A good starting point often overlooked is to reexamine the terms stipulated in the insurance contract, which could give wiggle room for higher premiums and improved customer value.
Other strategies include “give-gets,” a simple negotiation in which insurers, for example, postpone a customer’s premium increase in exchange for a longer contract. Another tactic often used by companies is to rearrange the elements of bundled service packages to better meet customers’ needs and merit a higher price.
Letting customers that could not pay more go may be taken as a solution to reducing the cost of inflation. But the cost of customer acquisition is much higher than retaining them. Insurers should not attempt to take the easy way out.
PUBLISHED ON
Aug 20,2022 [ VOL
23 , NO
1164]
Radar | Dec 19,2021
Fortune News | Feb 13,2021
Fortune News | Mar 04,2023
Radar | Mar 06,2021
Fortune News | Jun 19,2021
Radar | Jan 04,2020
Fortune News | Jan 13,2020
Commentaries | May 28,2022
Featured | May 25,2019
Radar | Dec 05,2018
Photo Gallery | 94103 Views | May 06,2019
Photo Gallery | 86376 Views | Apr 26,2019
My Opinion | 66202 Views | Aug 14,2021
Commentaries | 65551 Views | Oct 02,2021
Feb 24 , 2024 . By MUNIR SHEMSU
Abel Yeshitila, a real estate developer with a 12-year track record, finds himself unable to sell homes in his latest venture. Despite slash...
Feb 10 , 2024 . By MUNIR SHEMSU
In his last week's address to Parliament, Prime Minister Abiy Ahmed (PhD) painted a picture of an economy...
Jan 7 , 2024
In the realm of international finance and diplomacy, few cities hold the distinction that Addis Abeba doe...
Sep 30 , 2023 . By AKSAH ITALO
On a chilly morning outside Ke'Geberew Market, Yeshi Chane, a 35-year-old mother cradling her seven-month-old baby, stands amidst the throng...
Mar 23 , 2024
Addis Abeba has been experiencing rapid expansion over the past two decades. While se...
Mar 16 , 2024
In a striking move that has rattled the corridors of Ethiopia's export sector, the Mi...
Mar 9 , 2024
Mamo Mehiretu's tenure at the central bank's helm is marked by a distinct shift in fo...
Mar 1 , 2024
In the corridors of the Ministry of Finance, on King George IV St., a recent visit by...
Mar 23 , 2024
A microcosm of Addis Abeba's vibrant yet convulsive changeover unfolds in the jammed corridors of the Arada District Land Management & A...
Ethiopia's decades-old energy policy is evolving rapidly, opening doors for private sector involvement in...
Mar 23 , 2024 . By AKSAH ITALO
Minister of Finance Ahmed Shide has intensified efforts to enforce mandatory domestic procurements across...
Mar 23 , 2024 . By AKSAH ITALO
A policy measure that favoured steel importers over manufacturers was laid out as the major issue for the...