Article originally published by Allianz
What’s Causing High Inflation?
Whilst a number of factors are contributing to the current economic situation, a key influence is the ongoing war in Ukraine. This has led to global rising energy prices as Europe looks to relinquish its dependence on Russian oil and gas. Additionally, the financial sanctions issued against Russia have severely dented the UK’s economy, to the tune of £6.2bn. These challenges have further compounded the issue of diminished supply against rising demand as spending increased following the Covid-19 lockdowns.
What’s the Impact on the Insurance Industry?
The industry is seeing claims inflation across all lines of business. In motor, the increased cost of labour and parts, linked to advances in vehicle technology, has driven up the cost of vehicle repair. Furthermore, supply chain disruption and labour shortages have resulted in delays in vehicle repairs, leading to a higher demand for courtesy and hire vehicles. As a result, some insurers have had to foot the bill for credit hire and credit repair services.
It’s a similar story in the property and construction sector, which is suffering from rising construction material prices and supply chain disruption. The greatest price increases seen in the 12 months leading up to August 2022 were for gravel, sand, kaolin and insulating materials.
Project delays arising from these factors have the potential to drive up business interruption claims. Rebuild costs are also escalating for many reasons: increased fuel prices needed for transportation of materials; climbing energy costs used in the production of wood and steel and higher wages for construction workers against a backdrop of a shortage of labour. The BCIS house rebuilding cost index, which is used for updating sums insured, grew by 9.4% between October 2021 and October 2022. In response to the current economic climate and claims inflation, insurers are focussing on rate strength, inevitably leading to increased premiums for customers.
What’s the impact on customers?
Customers are seeing their premiums rise without necessarily understanding all the reasons why. Customers can combat the risk of underinsurance through the application of indexation via their Commercial Property insurance. This is the process of referencing various indices, including the Consumer Price Index (CPI) and Retail Price Index (RPI), to ensure an asset’s value is adjusted in line with changes in inflation and the cost of living. Generally this sees the sum insured increase in line with economic changes. Whilst the policyholder will only see a price change at renewal, most policies are index linked on a monthly basis. Whilst the indices used are reflective of inflationary pressures experienced in any period of insurance, indexation is effective when the baseline valuation of the property concerned is correct. It is the responsibility of the broker and customer to ensure that the sums insured are regularly reviewed and adequate for the risk in question. At a time when many policyholders are already struggling with the increased cost of living, there are concerns that insurance will be a key area where
people look to save money.
In July, the Financial Conduct Authority (FCA) warned that customers may cut or cancel insurance policies, potentially leaving them underinsured and reminded firms of their responsibilities of treating customers fairly. Indeed, the Chartered Institute of Loss Adjusters estimates underinsurance to be present on over 40% of claims. Where it transpires that a customer is underinsured there are several potential consequences. Firstly, the amount they can claim may be reduced, meaning they cannot claim for the full loss. They may also find themselves subject to the ‘average’ rule. This is where the insurer reduces the settlement by the same percentage by which the asset is underinsured. Either way, the customer is left out of pocket.
Another consideration is the indemnity period, particularly for Business Interruption cover. It’s
reported that most businesses require at least 24 months to recover their trading position and
any delay following a loss which exceeds the indemnity period can lead to additional uninsured costs, plus loss of revenue. Unforeseen delays can occur for a number of reasons, including waiting for planning permission, property reinstatement, lack of materials or supply chain disruption.
Summary
With no sign of the current economic crisis easing, the insurance industry has much work to do in remaining relevant and valuable to customers. Brokers can help customers by explaining the relationship between inflation and underinsurance and the importance of having the correct sums insured and sufficient indemnity periods. Insurers must continue to prove their worth by providing good advice, offering great products and propositions and a fair and efficient claims service. In a time of volatility, we need to provide reassurance.
Get in touch with one of our Client Directors today for more information on how to protect your business from the effects of inflation.
