The global events and challenges of the last three years have had a significant impact on the haulage and logistics sector. Cost pressures and sustained high inflation rates have increased premium rates by 25% over the course of 2023 and a further rise of 10% is forecast in 20241 which, for an industry reliant on transporting goods, can be a heavy burden to carry. Add to this the increase in personal injury claims costs, as well reinstatement/repair costs of depots and other property assets, and haulage businesses may need to reassess their total cost of risk against the cover offered by their insurance programme.
What is claims inflation?
Claims inflation is defined as the change in the expected cost of claims from one year to the next. Excess claims inflation is defined as changes in the cost of claims beyond ordinary economic inflation. This scenario needs to be considered by insurers for determining the value of a claim and setting an appropriate reserve, as historic claims data may not provide sufficient information when claims inflation is high.
A challenging motor insurance market
In the motor insurance space, several factors have combined to create a ‘perfect storm’ for claims costs.
Going back to the early stages of the COVID-19 pandemic and subsequent lockdowns, there was a sharp fall in motor claims due to the dramatic reduction in the number of vehicles on UK roads. According to figures published by the Association of British Insurers (ABI), the number of motor insurance claims settled by insurers in 2020 fell by 19%.2
This led to higher profit margins for insurers with many returning significant amounts of premium to their customers as vehicles were laid up. Insurers sought new clients to replace the lost revenue and haulage rates reduced, creating a set of soft market conditions with underwriters becoming more flexible and willing to negotiate coverage terms.
However, as normality resumed and vehicles returned to the road, demand for insurance increased and the market began to harden. Other factors such as insurance fraud and extreme weather events have compounded this challenging market.
Supply chain challenges and labour shortages
At the same time, there were manufacturing delays of the all-important microchips for vehicles, mostly due to COVID-19 lockdowns in China. The war in Ukraine then added to these problems, with Brexit also having an impact on the timely supply of vehicle parts. As a result of this combination of factors and events, the cost of vehicle parts and materials began to rise sharply, and therefore the cost of vehicle repairs. Add to this the labour shortages caused by the reduced migration due to Brexit as well as the early retirement by many during the pandemic, and repair times are being prolonged further.
Longer hire periods for replacement vehicles
Parts delays means vehicles can be off the road for longer that would usually be necessary. This has a knock-on effect on the hire of courtesy and replacement vehicles while the repair waits for the parts. Import costs and fuel costs are only adding to the issue.
When delivered, the parts are more expensive and the labour costs are also increased due to general inflation in the UK driving up labour rates—again, a knock-on effect of the labour shortages. Underwriters must pass on these costs to their customers, meaning higher premiums and, potentially, restrictions in cover.
Factors affecting liability claims
Changes to the Ogden discount rate have pushed up the cost of catastrophic personal injury claims. Other relevant factors are the rising costs of care and carers’ wages, the inflation on earnings claims costs (due to increases in the National Living Wage) the expense of prosthetics as technology becomes more sophisticated.
As well as personal injury claims, business owners must factor in the effect of inflation on the materials, repair and labour costs involved in third-party liability claims for property damage. Should an accident occur resulting in damage to third-party property—either due to one of your vehicles or another incident for which your business is deemed liable—the claim amount could exceed what your policy covers you for.
The new road rules of hierarchy
The Highway Code changes introduced in January 20223 are a further consideration for hauliers when it comes to liability, in particular the new hierarchy of road users. This rule was based on the premise that those with the potential to do the greatest harm to others should bear the greatest responsibility to reduce the danger they may pose to fellow road users. At the top of this hierarchy are pedestrians, followed by cyclists, horse riders, motorcyclists, cars/taxis, vans/minibuses, and—finally—large passenger and heavy goods vehicles.
Essentially, this rule means that hauliers are one of the main groups of road users who carry the greatest responsibility to ensure the safety of other road users, and therefore may be at higher risk of liability claims against them. Combine this elevated risk with the rising cost of personal injury claims and it can be vital to re-examine your liability cover levels as well as your investment in managing your risk.
How Gallagher can help
Our dedicated transport team can advise you on how to take control of your claims experience which is especially important in the current climate. We offer a Claims Defensibility Review service to help you reduce your exposure and help you defend your business in the event of a liability claim being brought against you.
Gallagher also provides a range of risk management services, including specialist fleet risk management services, through which we can help you protect your fleet investment and fulfil your duty of care towards employees and the public.
Insurance companies look more favourably on operators who are prepared to take a proactive approach to managing their risk. By supporting you with this, our team may be able to help you control costs, as well as reviewing your current insurance programme to ensure you have adequate cover for your business moving forward.
