Rising claims, rising costs: the inflation crisis facing insurers

As insurers continue to navigate elevated claims-cost pressures, economic uncertainty and changing risk dynamics, South African insurers are reassessing underwriting, pricing and risk management strategies in 2026.

FAnews spoke to Alex Karvelas, Head of Pricing at Bryte, about how these challenges are influencing underwriting practices, pricing strategies, and the role of brokers in managing risk.

Inflation and claims costs: market outlook

“The Reserve Bank's measured inflation has broadly been in line with official forecasts in 2026 so far. Insurance claims costs and inflation have broadly tracked in line with this as well. This has led to a softening of the commercial market as intermediaries and clients both expect premiums to mirror broader inflationary trends,” said Karvelas.

“However, the outlook for the rest of the year into 2027 is expected to be poorer due to the combined effects of three recent major shocks at a global level. These are: 1) Policy normalisation by the Bank of Japan causing tightening of liquidity in the US, Europe and Emerging Markets, 2) The closure of the Strait of Hormuz causing an energy supply shock, and 3) The diversion of Asian/European cargo around the Cape of Good Hope causing supply chain shocks. These global events are expected to drive up inflation and slow economic growth both locally and abroad,” added Karvelas.

Higher inflation, according to Karvelas, will drive up claims costs, and slower economic growth will result in lower or negative premium growth as policyholders look to cut their own costs under economic pressure. “The combined effect of higher claims costs and lower premium growth is expected to negatively impact loss ratios for the remainder of 2026.”

Karvelas’s insights highlight that insurers are entering a more challenging economic period, with global events directly influencing local insurance dynamics.

Underwriting challenges in a complex landscape

According to Karvelas, “The global uncertainty mentioned above, combined with the risks stemming from climate change and AI, with all its opportunities, poses the biggest challenges to insurers.”

“Global macroeconomic events drive uncertainty in the local business environment. This uncertainty means that supplier agreements become difficult for claims teams to manage. The viability of longer-term supply contracts is threatened when macro-economic events drastically change the cost-basis used to negotiate those contracts. On the underwriting side, it becomes more difficult to align growth ambitions and policyholder expectations with sound underwriting practice and discipline,” he said.

“The increasing use of AI within society alters expectations of the time taken by businesses to service clients. This means that brokers and policyholders expect faster underwriting decisions and query turnaround times. Insurers are faced with the opportunity to rise above competitors by implementing AI into workflows, but this comes with the added risk of using unproven technology. Aside from underwriting challenges, insurers face increased fraud and more difficulty in detecting it as bad actors use AI to submit illegitimate claims,” he cautioned.

“Climate has been the most persistent challenge faced by insurers over the last few years, and this is expected to continue into 2026. More frequent climate-related events give rise to increasing claims frequency, higher costs in the event of a climate-related loss and more difficulty in sourcing and affording reinsurance cover. The accelerated rate of climate change in the recent past has led to the breakdown of many climate models, making underwriting particularly challenging as previously unexposed areas start experiencing losses,” he continued.

Karvelas emphasises that these intertwined challenges - from AI-driven expectations to climate volatility - are testing the very foundations of underwriting discipline.

Pricing strategies under inflationary pressures

“Accounting for inflation has always been part of a sound pricing strategy. Renewal premiums and new business rates must consider the expected effect of inflation on future claims costs if an insurer is to maintain a sustainable portfolio. The typical period for review of these inflation effects, at policy renewal, is when the greatest influence will be observed. Previously, a pricing strategy might have required an annual inflation review; now, a quarterly or even monthly review might be more appropriate,” he said.

In practice, this means insurers are adapting to more dynamic pricing environments, closely monitoring inflation trends, and adjusting premiums with greater frequency. The combination of rising claims costs and changing client expectations demands a nimble, responsive approach.

Karvelas’s perspective reinforces that insurers may need increasingly dynamic pricing approaches as claims trends and risk factors evolve. 

Maintaining profitability amid rising costs

“Improving risk selection and effective risk management are critical for maintaining profitability in an inflationary environment. The expected impact of global macro-economic events will result in more downward pressure on premiums as insurers compete for the business of policyholders who are undergoing their own financial pressures. This means that insurers need to increase the granularity of their portfolio segmentation, improve the agility and accuracy of their pricing models and risk management, and enhance their ability to retain desirable business through targeted renewal strategies,” said Karvelas.

Battling claims frequency, according to Karvelas, is only half of the picture; “insurers need to win the war on claims severity. Claims teams will need to review supplier agreements, increase the speed of settlement and enhance their ability to detect fraudulent activity across stakeholders.”

Karvelas highlights that profitability depend on an insurers’ ability to balance meticulous risk selection and risk management with efficient claims management. As inflation drives up claims’ costs, insurers must refine their operational and strategic approaches to preserve financial health.

The evolving role of brokers and technology

“Advisers of policyholders play a key role in helping them understand and manage risk and inflationary pressures. Brokers can assist in translating ‘rising claims costs’ into business-relevant terms so that policyholders understand the impact on availability of cover, premiums and policy terms and conditions,” he continued.

“They can also assist by advising clients on appropriate risk retention, protection, management and transfer strategies so that policyholders enjoy adequate protection relative to their budget and risk appetite,” he added.

“Finally, brokers play an important role in managing claim costs. They not only help clients get looked after at claims stage, but they also prevent claims from ballooning unnecessarily, which has a direct impact on future premiums and policy terms,” he said.

When asked if specific technological innovations or strategies are being used in the insurance industry to mitigate the impact of rising claims costs and inflation in 2026, Karvelas said, “Machine learning and AI are driving industry strategies to mitigate the impact of inflation and rising claims costs. There are many use cases for these technologies, including underwriting and pricing automation, claims operational efficiency, and fraud detection and mitigation. Insurers who have a clearly defined and targeted strategy for the implementation of these technologies, and who can effectively implement that strategy, are the most likely to successfully mitigate the impact of rising claims costs.”

Karvelas underscores that brokers and technology together are central to the insurance response to inflation. While brokers help clients navigate complex risk landscapes, AI and machine learning enable insurers to streamline operations, detect fraud, and refine pricing - all essential in an era of rising claims costs.

Looking ahead

The South African insurance industry in 2026 continues to navigate unprecedented global and domestic uncertainty. Rising claims costs, inflationary pressures, climate volatility, and technological disruption continue to reshape underwriting, pricing, and client management. According to Karvelas, success in this environment will depend on a combination of disciplined underwriting, agile pricing strategies, targeted use of AI, and strong collaboration with brokers.

“The combined effect of higher claims costs and lower premium growth is expected to negatively impact loss ratios for the remainder of 2026,” Karvelas warns, emphasising that insurers must proactively adapt to maintain sustainable portfolios. By investing in robust risk selection, effective risk management, leveraging technology to improve efficiency and fraud detection, and working closely with brokers to guide policyholders, insurers can navigate these challenges while maintaining profitability and service quality.

In this evolving landscape, the ability to respond swiftly to inflation trends, macroeconomic shocks, and shifting policyholder expectations will define the competitive leaders in South Africa’s insurance sector. 2026 may be a testing year, but with strategic foresight, the industry has the tools to weather the storm and emerge more resilient.

Writer’s Thoughts

As risk becomes more dynamic, the role of brokers extends beyond placing cover to helping clients understand, manage and adapt to changing exposures. The future of insurance will depend on collaboration across the value chain, where sound underwriting, innovation and trusted advice work together to support sustainable outcomes. Please comment below, interact with us on X at @fanews_online or email me your thoughts.