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Why are insurance claims costs increasing and does this affect me?

Many factors can contribute to driving up the cost of claims and insurance policyholders need to be aware that, in turn, this could lead to higher premiums. Claims inflation can affect many types of insurance including motor, property, liability, plant and construction.

Written by Paul Brown on 26th June 2019

Why are insurance claims costs increasing and does this affect me?

Many factors can contribute to driving up the cost of claims and insurance policyholders need to be aware that, in turn, this could lead to higher premiums. Claims inflation can affect many types of insurance including motor, property, liability, plant and construction.

Motor Claims

In March 2018, the Association of British Insurers (ABI) reported that the average motor claim had risen to the highest level on record, at a cost of £2,936[1].  So what is driving this? 

Improvements in vehicle technology mean the use of more complex components. For example many LED matrix headlamps and automated headlight systems are not repairable so that even minor damage can require full replacement of the existing part. Not only can this increase cost but these parts can be harder to source which, in turn, can result in extended repair times and potential third party credit hire costs.

Advanced Driver Assistance Systems (ADAS) are also becoming more popular and some newer vehicles are equipped with LiDAR (Light Detection and Ranging), which usually sits behind the bumper, meaning that any damage to this part of the car could also result in damage to the technology.

In addition there is a growing body of evidence that keyless cars are easier to steal than those with a traditional key.

 


Even the humble windscreen can now be so packed with technology that they can come with a high price tag and increased labour costs.

So whilst technology is making our roads safer, it can also heighten the loss when an accident, or a crime occurs.

To compound the problem costs associated with traditional repairs are also on the increase. The rising price of paint is being blamed on a shortage in supply of pigments and in January 2018, the British Coatings Federation reported that higher prices for resins, solvents and pigments had all added to the pressure on manufacturers[2].  The slide in value of sterling has also impacted the cost of imported parts and since many bodyshops no longer hold these parts, there can be delays before repairs can commence, impacting upon both accidental damage and third party spend.  In addition, steel and aluminium tariffs, plus the use of modern materials such as carbon fibre, can cause the cost of car body panels to rise.

Construction Claims

In 2017, the ABI confirmed that the number of fire claims had decreased over the last decade, but the average claims cost had significantly increased[3].

So what is driving this?

Newer techniques and modern methods of construction have been known to lead to more rapid spread of fire due to the use of lightweight, combustible materials[4].  Concerns have also been raised about hidden voids in component parts which can allow water to permeate, the ability of modern materials to withstand the effects of flooding has been called into question and the terrible Grenfell Tower fire in 2017 demonstrated the issues surrounding cladding.  All of these factors can push up damage costs.  

The property market has also suffered from the rising price of raw building materials due to the depreciation of the pound and a high demand in the international markets.  Often, customers have to bear the brunt as these higher costs are passed on.  In April 2018, the Federation of Master Builders (FMB) reported year-long lead times for bricks and tiles, with supply issues driving up the costs by an average of 9% and 8% respectively[5].

And then there is the cost of labour. According to the Office of National Statistics, compared to the previous year hourly wage costs increased by 2% in the Q3 July 2018.  This and a shortage of skills, is pushing up construction costs and there are fears that Brexit could exacerbate the issue as currently, approximately 13% of workers in the UK’s construction of buildings sub-sector are non-EU nationals[6].

Liability Claims

Medical advancement and innovation now makes survival following a serious accident and extended life expectancy more likely. While this is hugely positive, the future loss of earnings, medical and care provision, and home adaptation aspect of injury claims can be significantly increased.

Social cost inflation is also likely to impact on heightened claims costs. With an aging society, people are working longer and thus increasing their earning potential in order to fund retirement.  This means that damages awarded to third parties are rising faster than inflation.  

Theft Claims

The theft trends currently being witnessed in the UK mirror those normally seen during times of recession.   The Crime Survey for England and Wales reported an 8% increase in general theft between June 2017 and June 2018 and a 6% increase in vehicle-related theft over the same period[7].

But thieves are not only stealing cars. The construction sector has seen an increase in the number of plant thefts and the number of stolen excavators, diggers, bulldozers and other plant equipment rising steeply, from 428 claims in 2013 to 665 in 2017[8]Tool and van theft has also peaked, with reports that a van is broken into every 23 minutes in the UK[9].

Stolen items are also becoming increasingly easy to sell with the proliferation of free classified advertisement sites and social media sites facilitating quick sales.

Globalisation

Globalisation has seen the development of more complex supply chains and shared infrastructure and where previously, supply chain disruption may have had a limited impact, incidents may now take longer to resolve and can lead to business interruption across numerous companies generating multiple claims.

Extreme Weather Events

Weather events can have an impact on both the severity and cost of claims. Many instances of severe flooding, in recent years, such as caused by Storm Desmond in 2015 and Storm Callum in 2018, produced a spike in the volume and cost of claims.   

Claim Fraud

If the increase in insured exposure was not enough the threat of fraudulent claims is also rising.  With fraud adding an estimated £50 to every UK insurance policy and with a possible further increase in fraudulent activity, should there be an economic downturn following a 'no-deal' Brexit, this is a growing area of concern for insurers.   

There is no quick fix to the threat of claim inflation and the natural outcome lies in increased premiums. Clients should aim to limit their risk exposure and keep claims costs in check through robust risk identification and management.  For further information speak with your usual Franklands contact.

Footnote

 

  1.  www.abi.org.uk/news/news-articles/2018/03/average-motor-insurance-claim-at-a-record-level-says-the-abi/ 
  2.  www.coatings.org.uk/article/raw-material-prices-add-to-pressure-on-profitability-287.aspx 
  3. https://www.abi.org.uk/globalassets/files/consultation-papers/member/2017/11/abi_ind...
  4.  https://www.telegraph.co.uk/business/risk-insights/modern-methods-of-construction/
  5. www.independent.co.uk/news/business/news/brick-shortage-supply-building-firms-raw-material-costs-a8312746.htm
  6.  https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/articles/migrantlabourforcewithintheconstructionindustry/august2018
  7. https://www.ons.gov.uk/peoplepopulationandcommunity/crimeandjustice/bulletins/crimeinenglandandwales/yearendingdecember2018
  8.  https://www.allianzebroker.co.uk/news-and-insight/news/construction-plant-theft-is-on-the-rise.html#
  9. www.phpionline.co.uk/feature-articles/online-exclusive-severe-van-tool-theft-uk/

 

Source: https://view.publitas.com/biba/a-biba-brokers-guide-to-claims-inflation-trends/page/4-5




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