Risk management is the best way to control insurance costs

Rapid increases in inflation triggered by the pandemic and compounded by war in Ukraine are thankfully showing signs of easing. According to the IMF, global inflation is expected to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024, albeit still above pre-pandemic levels of about 3.5%. 

Yet core inflation remains stubbornly high in many markets and volatility is likely to continue. Labour markets are tight while energy and food prices remain elevated due to the ongoing war in Ukraine. Heightened geopolitical and economic uncertainty, along with seismic changes brought about by decarbonisation and digitisation, threaten to trigger future supply chain disruption and price hikes.  

How does inflation affect insurance? 

The impact of inflation on insurance is complex and multi-layered, affecting both reserves and future claims costs, across almost all lines of business. Claims are settled at today’s higher prices but on policies underwritten when inflation rates were much lower. Inflation can also affect ongoing claims, increasing reserve estimates for long-tail liability lines and complex business interruption, which can take many years to settle.  

For property lines, the increased cost of materials and labour is already affecting property claims. The costs of rebuilding and recovery have risen with big increases in construction costs, which are driven by increased prices for key building materials, higher fuel prices and transport costs, as well as shortages of skilled labour. According to the CBRE Construction Cost Index, building costs in the US increased by an estimated 14.5% in 2022 and 11.5% in 2021. In Europe, construction costs increased by more than 16.5% between the first quarter of 2021 and the second quarter 2022.  

Supply chain disruption and inflation can also amplify property damage and business interruption claims. Delays in obtaining spare parts lead to longer periods of downtime, while shortages of skilled labour and higher prices can result in increased costs of working. Some businesses have also experienced extreme volatility in revenue and profit in recent years, with post-pandemic surges in demand and higher commodity prices. 

Motor repair costs and values have also increased since the pandemic, in part due to an ongoing global shortage of semi-conductors. Scarcity of skilled labour, energy prices and increased costs and delays in obtaining spare parts have all contributed to higher repair costs, while the shortage of vehicles saw courtesy car costs increase by around 30%, according to the ABI. In addition, the average price of second-hand cars in the UK increased by 19% in the year ending July 2022. 

What about liability lines & other impacts? 

Businesses are generally alive to the impact of inflation and supply chain disruption on property risks, but it is important not to lose sight of the potential implications for liability insurance.  

Casualty lines are also seeing the impact of inflation and labour shortages feed through to claims. Legal, medical and care costs are on the rise, as are transport, accommodation and therapy costs, while wage inflation feeds through to loss of earnings claims. These inflationary pressures are particularly acute for severe and large complex personal injury, where claims take time to settle and cover long periods of indemnity. 

Insurers and policyholders also need to consider the ripple effects of the recent increase in inflation and ensuing economic uncertainty. The businesses we insure are all managed and staffed by people who will have been impacted by the pandemic and current economic uncertainty and policyholders need to be aware of the mental health impact this can have on employees, their mental wellbeing and also risk awareness. Whilst accidents can always happen, in our experience they are more likely when things are at their most uncertain. 

What should I consider ahead of renewal? 

Now is not the time to just roll over last year’s insurance at renewal. Changes in exposures will have implications for the type and scope of cover required, as well as the information required by underwriters. QBE has been working with its customers on more holistic forms of risk financing and alternative structures that help maintain insurance programmes in line with inflation. Deductible levels, aggregate retentions, limits and indemnity periods set just a few years ago may no longer be appropriate, given the compound effect of higher inflation over a number of years. It is also important to reflect whether the traditional economic measures of risk exposure are the most appropriate during inflation. With wageroll increases, staff numbers may have been static or dropped. Additionally, it is important to consider if rising business turnover is a result of costs or productivity.  

Businesses will need to think about the most appropriate covers and structures in order to avoid underinsurance or over insurance amid changing exposures. Some insurance products provide direct indemnification based on the sum insured, placing the onus on the insured to value property accurately. Other policies may include provisions for inflation, but even these may need to be reviewed during periods of prolonged inflation. 

Businesses should consider the following to ensure their insurance coverage is fit for future inflation:  

• Do deductible levels and attachment points reflect changes in inflation?  

• Are property and liability policy limits and sub-limits sufficient?  

• Are indemnity periods appropriate and able to cope with supply chain disruption or delays? 

• Are current measures of exposure still relevant?  

• Are values and exposures accurate and appropriate? 

Risk management is the best way to control insurance costs 

At a time of rising prices and supply chain disruption, investments in loss prevention and risk mitigation will pay even bigger dividends. By fostering a culture of loss reduction and mitigation, businesses can help counteract the inflationary-driven increased cost of claims, contributing to the long-term sustainability of insurance.  

There are many steps that business can take to reduce insurance costs, by minimising potential property losses, increasing diversification, or looking out for employees. For example, businesses can assess their mental health and wellbeing strategy using QBE’s self-assessment tool, and develop an improved, more holistic risk management strategy. 

We believe the case for working with your insurer has never been stronger. By making maximum use of risk engineering, risk management services and advice, we can help break the link between inflation and claims.