Claims inflation is likely to become a pressing issue in 2017, requiring a greater focus on risk management and loss mitigation.
Rising claims costs
UK commercial insurers have been making louder noises about claims inflation in 2016. Costs have been increasing in a number of areas, including materials, repair costs and labour, as well as the increased costs of handling a claim.
Costs are also likely to come under further pressure in 2017 from a number of other sources, including the potential impact of Brexit. The UK inflation rate jumped to 1.6% in December from 1.2% in the previous month, reflecting higher airfares and food prices.
The fall in the value of Sterling since the Brexit vote in June last year – in mid-January the pound hit 30-year low against the dollar - is also increasing the costs of imported materials, components and products. For example, the construction and food sectors are already seeing the cost of materials and ingredients rise. Energy prices are also expected to rise to reflect higher wholesale prices and the recovery in oil prices seen in the second half of last year. Wage inflation could also start to creep up with low levels of unemployment and increased demand.
One specific area where losses have been trending upwards has been for flood - winter storms and floods at the end of 2015 and early 2016 were estimated to have caused some £5bn in damage. These floods also resulted in a number of large commercial claims for insurers and resulted in some sharp increases in premiums for some insureds, including those in the social housing sector and in high-risk locations.
For insurers, rising claims inflation could be problematic. A sustained soft market has seen insurers margins squeezed, offering little cushion to absorb any increase in claims costs.
Insurers will be under pressure to raise rates in response to claims inflation. However, the UK commercial insurance market is fiercely competitive with additional capacity entering the market all the time.
In this market, underwriters will have little choice but to turn their attention to their expense ratios. As insurers increase the focus on controlling claims costs, some will no doubt become less flexible when settling claims in 2017.
The message for mid-sized clients in the UK has to be around the importance of risk management and loss avoidance and mitigation, whether it is flood risk or general commercial property/casualty exposures.
With many sectors enduring intense competition and inflationary pressures, cost will come under increasing scrutiny in 2017. However, companies will need to demonstrate that they have robust risk management processes in place, that are embedded in the organisation and that are supported and sponsored by senior management.
By doing so, clients can help insurers limit the impact of claims inflation and improve the perception of their business with their insurers, which should result in more stable pricing in the long term.
For further information, please contact Stuart Winder, Head of UK Retail on +44 20 7528 4756 or email firstname.lastname@example.org