Claims inflation is rising at an exceptional rate pushed up by a multitude of both global and market-dependent factors, with upward pressure likely to continue for the foreseeable future.
Factors including geopolitical instability, the ongoing impacts of COVID-19-related lockdowns, global labor and materials shortages, supply-chain disruption, the continued ramifications of Brexit, cross-the-board price hikes reflected in record inflation rates, and the escalating energy crisis, are creating one of the most challenged-claims environments in recent history.
Such a spectrum of drivers means hefty cost pressures are currently being experienced across all business lines and territories. This is all set against a backdrop of growing loss complexity coupled with rising social inflation, particularly in the US but also increasingly in other countries, and unsurprisingly is spawning a greater risk of underinsurance with declared values falling increasingly short of reinstatement costs.
Inflation continues to rise at record-breaking levels in many regions across the globe. In the UK at the time of writing inflation had topped ten percent, with Brazil, the Netherlands and Spain at a similar level, while the US and Euro Area were both around eight percent. Extreme inflation hikes of over 70 percent, however, are being experienced in Turkey and Argentina.
It is important to note that the drivers for general inflation do change by region. A recent assessment of inflation factors by territory conducted by Crawford revealed that inflation in the US was primarily driven by rising labor costs, energy prices and interest rates, while in the EU drivers included energy and fuel prices, the cost of living, and the growth in the region’s population, and in China it was excess money supply, energy blackouts and supply and demand constraints.
Rises across the board
It is only possible in this blog to illustrate some of the drivers of claims inflation Crawford is seeing across the insurance landscape.
Replacement and reinstatement costs in sectors such as property, construction and engineering have risen sharply in recent years reflecting a combination of material price hikes, product shortages, fuel costs, ongoing supply disruption and manufacturing bottlenecks. Building costs have been impacted by price hikes of around 100 percent since 2019 on key items such as fabricated structural steel and concrete reinforcing bars, while there are also issues for more energy-demanding products such as aluminum.
In conjunction, supply chain issues are impacting completion times, which are being further exacerbated by labor shortages, contractor solvency issues, and the surge in demand for construction work post-pandemic. These factors are extending rebuild periods significantly which in turn is ramping up business interruption claims resulting from extended loss of trade.
Motor claims costs are also on the up driven by multiple factors, with WTW recently reporting a plus six percent rise in claims payouts in 2021. Supply chain issues are once again a factor for damage-related claims, while the rise in second-hand car prices coupled with availability and cost of parts and rising labor costs are elevating repair figures. There has also been a marked increase in bodily injury claims as access to medical assessments improves in the aftermath of the pandemic. Further, casualty-related claims in general continue to feel the impact of rising social inflation, with payout rises prevalent in areas such as D&O and PI-related claims.
On the marine front, price inflation is having a sharp market impact with cost rises across most goods impacting cargo claims, while significant increases in vessel costs are impacting the hull sector. Further, the blocking and trapping claims relating to cargo prevented from moving due to the Ukraine conflict is expected to have a major market impact.
Focusing specifically on the UK market, a recent study by Crawford identified an emerging trend in the cost of claims reinstatement driven by both Covid and Brexit, with multiple aspects combing to create a perfect storm for reinstatement. Factors ranged from labor rates and skilled trade shortages to growth factors in the construction sector increasing demand, weather impacting timber production, shipping costs and supply bottlenecks.
Assessing the drivers for claims cost increases in terms of property restoration (which generally accounts for approximately 85% of the cost of a claim), key drivers for flood-related claims included cost rises in skirting boards, Karndean flooring, and emulsion; while for fire it was timber plank cladding, corrugated steel roofing sheets, and soot removal film; and for the storm in addition to corrugated sheets, it was also flat roof decking, flat roof felt, and roof slate.
Taking control of claims costs
In such a price-hiked environment it is critical that insurance companies are employing every capability at their disposal to help manage claims costs effectively and speed-up claims resolution times, while also supporting insureds where possible in efforts to address repair or rebuild requirements.
At Crawford, we are working with clients across the board to help mitigate the effects of claims inflation and we are supporting proactive steps to better manage claims costs. These efforts range from capitalizing on enhanced digitization and robotic process automation to improve claims efficiency to connecting insureds to our expansive network of tradespeople and suppliers through our Contractor Connection network.
We also recognize the value of business-critical insight and will shortly be releasing our Claims Inflation report which will address the various drivers through the adjuster lens, assess the direct impacts on various business lines, as well as tackling hikes in business interruption losses and the growing issue of underinsurance. Further, it will outline steps insurers can take to help manage claims inflation and facilitate cost reduction across the claims cycle. To receive a copy of this report, please email email@example.com. Also as part of this effort, we offer you the opportunity to subscribe to receive monthly marketing emails about services, news, and events from Crawford group companies.