Managing benefit plans in an era of soaring inflation 

Uncertainty has been the name of the game for benefit specialists over the past few years. However, very few benefit managers have had to cope with the high levels of inflation we are experiencing in 2022, nor with the imminent threat of a potential inflationary recession.

As a result of these economic challenges, employees are facing multiple new hardships. In response, employers are trying to get ahead of what meaningful inflation means for the design and financing of their employee benefit and well-being plans.

Industry concern is high — as shown by the fact that governance and financial risks featured prominently in our People Risk 2022 research. Three such risks were in the top ten of the 25 risks reviewed. (These were: administration/fiduciary; increasing cost of health, risk protection and well-being benefits; and benefits, policy and reward decision making and accountability).

Pensions are one immediate priority, with both plan sponsors and beneficiaries concerned about the erosion of purchasing power and the dependability of past assumptions made about funding and income streams.^[1] Concerns are also high in relation to risk protection benefits (such as group life and disability insurance), which are influenced by investment earnings. It is clear that the current economic situation could lead to pricing changes, and those involved in life, disability and medical insurance pricing may already be seeing early signs of the insurance market hardening.

In light of these developments, a key question must be asked about medical and insured benefits: Will the current inflationary environment affect them in a significant way?

While employer costs for employee medical coverage are impacted by inflation (in rises in the per unit costs for medical services and supplies), other factors must also be considered for budgeting and rate setting. These include:

• Altered treatment mixes (e.g., moving to more expensive treatments)
• Changes in utilisation patterns (e.g., people not accessing services due to COVID-19 restrictions)
• Rising interest rates (which typically boost the investment returns of insurers and enable them to offset some of the higher claims they are liable for)
• Regulatory changes

The hard truth is that insurers, advisers, and plan sponsors are facing many difficult questions when they try and anticipate 2023 claims: Will preventive care that was deferred during the pandemic translate into later-stage diagnoses? Will compensation increases for exhausted health-care workers result in patients and payers shouldering higher costs? Will demand for new treatment regimens further drive up claims or will it make the management of conditions more effective?

One encouraging sign is that, around the world, inflation in medical costs is not as pronounced as the inflation being seen in energy and food prices:

It is our view that 2023 renewals are more likely to be impacted by changing claim utilisation factors and general market hardening than by inflation itself. However, if inflation is persistent, medical coverage design and financing will be affected. We are already starting to see the first signs of this in markets such as Turkey, where consumer prices have increased by 78.6% annually. This has resulted in a smaller — but still impactful — 39.3% increase in prices in the health sector.^[9]