13th April 2023
Thinking Risk - The Impact of Inflation on the Insurance Market
The cost of living increased sharply across the UK during 2021 and 2022 and continues to rise in 2023. The annual rate of inflation reached 11.1% in October 2022, a 41-year high, before easing slightly to 8.9% in March this year.
The overall outlook for growth in the economy remains stagnant – the British Chambers of commerce (BCC) forecasts the economy will not return to its pre-pandemic size until the final quarter of 2024. The BCC expects UK economy to avoid a technical recession but shrink by 0.3% in 2023, before returning to growth in 2024.
How are these economic factors impacting insurers?
Low growth and inflation both have a significant impact on insurers as their claims costs increase while the value of their investments decrease. Insurers are passing this economic pain on to their customers as they strive to make a profit – focussing on rate strength, inevitability leading to an increase in premiums.
| Inflation Sensitivities for different Lines of Business | |||
| Insurance Cover | 2022 | 2023 | Explanation |
| Property | High | Above average | Material prices peaked in 2022 but wages still rising in 2023. |
| Motor | High | Average | Higher cost of car parts due to supply chain issues and wage inflation |
| Liability | Average | Above average | Wage increases, social inflation |
Property Insurance
Inflation combined with supply chain delays and workforce scarcity are severely increasing property repair and replacement times and costs. For insurers these factors compound the global increase in frequency and severity of property claims due to natural disasters, making property a class of insurance that has seen very severe and rapid rating increases.
Underinsurance has long been a problem in the property insurance market, and the current environment is exacerbating this issue. It is not uncommon for property owners’ actual rebuild values to be double that covered on their insurance schedule. Similarly rebuild times have extended, and this results in the need for a longer period of indemnity for business interruption policies.
Motor Fleet Insurance
Repair cost inflation has been fuelled by a shortage of car parts, beginning with the widely reported pandemic semiconductor chip shortage. The conflict in Ukraine has further fuelled this shortage as Ukraine produces 50% of the world’s neon, which is vital for semiconductor chips. Ukraine is also a major supplier of nickel and palladium, which is used in electric batteries and catalytic converters.
These factors increase the cost of repairs and also therefore the likelihood of vehicles being “written off” – a vehicle is typically written off when the total vehicle hire charges and cost of repairs exceed the replacement value.
Liability Insurance
Inflation is impacting Employers, Public and Professional Liability claims where defence costs are increasing, and “social inflation” is driving higher jury awards for personal injury claims and a shift in attitude towards litigation and awards generally.
For casualty policies, wage and medical costs are further driving up the costs of claims.
How to manage this difficult insurance market.
Ensure your Property Sums Insured, and Liability Limits of Indemnity are updated
Insurers will reduce property claims payments proportionately to the degree of underinsurance, so it is vital to ensure property sums insured are up to date. The best way to do this is to have a professional rebuild cost assessment carried out. This can be done cost effectively – and is an important investment to ensure adequate cover is in place. Ask your broker to recommend a rebuild cost assessment agent. More information about property underinsurance can be found here – https://www.grpgroup.co.uk/our-broker-businesses/thinking-risk/why-it-is-vital-to-ensure-your-property-sums-insured-are-accurate/
In the light of the increasingly litigious and expensive claims environment, it is vital for businesses to ensure that their liability insurance policy limits are sufficient to cover their potential claims costs. If limits are breached, the insured is responsible for paying any additional costs and awards – and the potential scale of these costs can
be huge.
Risk Management
Ultimately to influence insurance premiums businesses have to reduce claims rates, and help their broker demonstrate that theirs is a business which pro-actively manages risk. Ensure your business has documented policies and procedures supported with effective and recorded management processes and training. Demonstrate your business’ proactive attitude by addressing any insurer survey or risk improvement requirements quickly and efficiently. GRP brokers can provide advice and access to resources to help manage a spectrum of risk areas, from health and safety to fleet risk or disaster recovery planning.
Engage with your broker early in the renewal process
The hard market means that underwriters will focus their energy on winning and retaining risks which are well managed, and presented clearly with all of the required information. Make sure you engage with your broker early and provide the detail they need to help them present your risk in the best possible light.