Protecting Insurance Portfolios from Inflation

Ken Griffin and Edward Y Yao

The unprecedented steps taken by the Federal Reserve Bank of the US towards monetary expansion since the financial crisis in 2008 have made the need to protect invested assets against inflation of utmost importance. It is necessary to combine insurance company modelling expertise with insurance asset management experience to develop an investment solution that will help to protect the value of a portfolio during periods of accelerating price inflation.

INFLATION HISTORY AND OUTLOOK

Inflation in the US has been stable and low since the 1990s. Since 1980, the annual inflation rate, measured by the change of the Consumer Price Index-All Urban Consumers (CPI-U) over a 12-month period, has declined from above 10% to the 2–4% range (Figure 16.1). During the Great Recession starting in 2008, it decreased well below 2% and into negative territory. However, high inflation is more common if we look at global inflation over a longer history. There were periods of runaway inflation in the late 1970s and early 1980s in the US, but it was still dwarfed by the inflation in some other countries. Brazil was one notable example, with inflation north of 1,900% in 1989 and 2,400% in 1993. In