The Bank of England expects inflation to reach 8% this spring,1 and the cost of living crisis is deepening—with the double impact of COVID-19 and Brexit continuing to be felt across many industry sectors. Global events such as the Suez Canal blockage and Texas flooding in 2021, and the current situation in Ukraine, have also had a significant effect on supply and distribution of raw materials, pushing up prices.
So, it may come as no surprise that the costs of insurance claims and premiums are also rising, with claims inflation estimated to be running at around 10%.2 There are a number of reasons for these increases that we are predominantly seeing across property, motor and casualty.
Property repair and reinstatement
Supply chain disruption and a shortage of skilled labour continue to affect the construction industry, with building repair costs and delays to the completion of work increasing significantly. In cases when repair works dictate alternative accommodation for the insured, this timeframe can be much longer than usual, forcing up the cost of the claim.
To further complicate the situation, contractors can be selective about the work they take on, often choosing other construction work over the less profitable work of insurance repairs. We are also seeing interruption periods increased due to delays and backlogs in planning approvals before the repair and reinstatement of buildings can even begin. All of these issues can put business interruption indemnity periods and sums insured under pressure.
Again, supply chain issues are causing delays in obtaining parts required to carry out vehicle repairs, meaning vehicles may be off the road for longer than is typically necessary. This, in turn, has led to a supply and demand problem for courtesy and hire vehicles, and an increase in cost to insurers footing the bill for credit hire and credit repair services.
The cost of repairs, labour and parts has risen, and waiting times for new vehicles have grown. The shortage of secondhand vehicles continues to push up their value, and in some cases, used commercial vehicles are being sold for more than they cost new. This is increasing total loss settlement costs. In cases where vehicles are declared a write-off, sometimes initial settlement offers are being rejected by insureds due to the increased value of their vehicle.
Where policies are written on an agreed value, or tied to a value declared to insurers at last renewal, the settlement may not be sufficient to cover the cost of a replacement vehicle, leaving the insured to meet the shortfall.
In other claims scenarios, vehicles that may have previously been written off are being repaired, either because of the vehicle’s value or the scarcity of suitable replacement vehicles. However, advancement in vehicle technology can mean that some parts are too expensive to replace, and specialist labour is also too costly, so repair may not be feasible, and total loss settlement is the only option.
The shortage of new and secondhand vehicles is also leading to an increase in vehicle theft—and, therefore, claims—while catalytic converter theft also continues to be an issue.
Casualty and motor injury claims
Changes to the Ogden discount rate have driven considerable increases to the cost of catastrophic personal injury claims. The rate in England and Wales currently stands at –0.25%, and is set for review in 2024. However, insurers do not expect this to work in their favour, and as accidents happening now may lead to claims in the not-too-distant future, they are factoring it into their pricing. Combine this with the expected 10% increase in general damages recommendations set by the Judicial College (JC) Guidelines, and the cost of personal injury claims looks like it’s only heading one way. And the same can be said for Scotland and Northern Ireland where the current rates are -0.75% and -1.5% respectively.
There are other factors to consider, too, such as the rising cost of care and carers’ wages, the cost of alternative accommodation (again, bearing in mind the increasing costs of building work), the expense of prosthetics as technology becomes more sophisticated, and improvements in diagnosis around chronic pain and subtle brain injury. The increases in the National Living Wage will also inflate loss of earnings claims costs.
What can businesses do to keep claims costs down?
Generally, the earlier the insurer can intervene, the lower the overall costs are likely to be. Improved data analytics enables businesses and insurers to make more informed decisions more quickly, so the more detail you can provide, and the sooner you can provide it, the sooner the claim can be settled—and the greater the potential to minimise costs.
Providing CCTV or dashcam footage, if available, may also help a claim to be settled more quickly. In addition, it’s important to highlight any concerns about the incident, as this can help the insurer to investigate and tackle fraud—one of the key drivers of higher premiums.
As your broking partner, while we cannot control the premiums determined by insurers, we can help you find a suitable, cost-effective insurance solution for your business. We can also work with you to create a more robust risk management programme for your organisation, to reduce the likelihood of a claim situation occurring in the first place.