The recent surge in inflationary pressures has sent shockwaves through the insurance industry, posing significant concerns for financial stability and operational losses. In response, the Bank of England has issued letters to Chief Actuaries of general insurance firms, highlighting the urgent need to address claims inflation, solvency risks and increased vulnerabilities.
With the UK’s cost inflation rate reaching 8.7% in June 2023, insurers are grappling with the daunting task of managing claims costs in a rapidly changing and inflationary environment. Influenced by various social, economic and geopolitical factors such as Brexit, the long-tail impacts of the COVID-19 pandemic, and the ever-present threat of fraud, insurers can no longer rely solely on historical claims data for accurate reserving and claims adjustment.
In partnership with Risk Management Partners (RMP), we have developed a comprehensive risk and claims cost guide to help insurers tackle these critical issues and maintain compliance. We also highlight the top three insurance lines most affected by inflationary pressures. By understanding these key areas of vulnerability, insurers can proactively adapt their strategies and ensure they are well-equipped to navigate the evolving landscape of the insurance industry.
Property claims inflation significantly impacts sums insured and settlement costs. General price increases can be attributed to factors such as the availability and cost of labour, availability of materials, and inflationary pressures in energy and haulage costs. The COVID-19 pandemic has exacerbated these issues, leading to supply chain disruptions, increased demand following project delays, and a shortage of construction workers.
There has been a substantial increase in the cost of construction materials. The average cost of construction materials rose by 4.7% in April 2023 compared to the same month in the previous year with shortages of essential products like bricks, blocks, and cement. Contractors are facing high demand, enabling them to be selective about the work they take on, often opting for more profitable construction projects over insurance repair work. This selectivity can result in backlogs and delays, impacting business interruption indemnity periods and putting sums insured under increased pressure.
The combination of these factors has led to significant challenges in the property claims arena, driving up costs for insurers and policyholders alike. As the insurance industry grapples with these inflationary pressures, finding effective strategies to address these issues becomes crucial to ensuring financial stability and delivering on the promises made to policyholders.
- Motor Claims and Repairs
The COVID-19 pandemic initially caused a substantial reduction in motor claims. During the lockdown period, motor insurers reported a 70%-80% decline in claims, which benefited them but adversely affected the accident repair sector. As traffic volumes returned to normal, motor claims started increasing again, although potentially to a lesser degree than before the pandemic due to unknown factors like differing driving patterns and behaviours.
The shortage of new and second-hand vehicles has also led to increased vehicle theft, resulting in higher claims. Rising energy prices, increased courtesy vehicle costs, and changing staffing demographics further impact the motor repair industry. The Association of British Insurers (ABI) reported rising energy and material costs, parts delays affecting around 40% of all work, and increasing courtesy car costs. These factors contribute to claims cost inflation in the motor insurance sector.
- Personal Injury
Inflationary pressures also affect personal injury claims. A recent case heard in the Coventry Combined Court addressed the impact of inflation on awards for Pain Suffering and Loss of Amenity (PSLA) in personal injury claims. The court recognised the significant increase in inflation levels and decided that the brackets for PSLA in the Judicial College Guidelines (JCG) should be adjusted accordingly. The drop in the value of money since April 2022 necessitates an approximate 12% increase in the JCG figures. This change in circumstance due to inflation will impact the assessment of damages and the offers made for PSLA. Insurers will need to consider these inflationary factors when assessing claims to control indemnity spend.
Keeping Costs Down
To mitigate the impact of inflation on claims costs, insurers can adopt several strategies. Early intervention can help lower overall claims costs, while improvements in data analytics enable better-informed decisions. Prompt and efficient claims settlements minimise costs while demonstrating effective risk management practices can influence premium rates. Additional tools such as CCTV, dashcam footage, and witness statements help investigate and tackle fraudulent claims, a significant driver of higher premiums. It is crucial to regularly review reserves to ensure they align with the changing claims landscape.
Inflation continues to pose challenges for insurers, with rising costs of goods, materials, and energy affecting various insurance lines. To navigate these inflationary pressures on claims costs, insurers must actively seek out efficiencies in claims management and develop strategies to control costs. Gallagher Bassett can provide valuable guidance and support to insurers in managing these challenges effectively. Contact our team today and learn how to mitigate the impact of inflation and maintain profitability in an increasingly volatile market.