By John Bowers, Actuarial Product Director, RNA Analytics
A surge in global inflation, which now stands at multi decade highs in many countries, and a cost-of-living crisis are taking their toll on businesses and individuals – with a number of repercussions for insurers in certain lines of business –some of which will be felt more deeply than others.
Amid plummeting consumer financial resilience, a tightening of belts in the UK has already resulted in some individuals opting to cancel discretionary insurance cover in a bid to reduce spending. GlobalData’s 2022 UK Insurance Consumer Survey of over 4,000 insureds shows that one in ten travel and pet insurance customers cancelled their policy for this reason, and a further 10.2% were considering doing the same in 2023. Other discretionary policies, such as home and life insurance are also in the firing line.
In addition to this rise in cancellation rates having a detrimental impact on insurers’ revenues, they will be facing their own resilience issues as operating and claims costs soar. Carriers focused on non-compulsory lines will feel the greatest pain here, with capital adequacy issues anticipated to hit monoline carriers the hardest – to the extent that some business models may no longer even be viable.
For high-net worth insureds, meanwhile, inflation is now a bigger risk than even burglary or theft, according to data from insurer Ecclesiastical. Its conversations with UK brokers show that 75% believe that, as inflation continues to rise, a lack of regular valuations is leading to underinsurance. Inflation is not the only driver here. Issues relating to supply have also driven up the value of goods – from supermarket staples to high-end items.
In the UK, the issue of underinsurance is widespread. RSA’s new Broker Pulse reveals more than 93% of brokers believe underinsurance poses a major threat to UK businesses during ongoing economic turmoil; leading to a dramatic shift in the provision and take-up of insurance. Personal accident insurance is the most likely form of cover to be jettisoned by businesses, according to RSA, as nearly 30% of brokers see this as the most reduced or altered cover. Legal protection, product liability and sole trader insurance all follow close behind at 25%.
Underinsurance is not a new problem, but it has gradually worsened in recent times – and started to ring alarm bells during the pandemic. The Chartered Institute of Loss Adjusters says that over 40% of all commercial claims exhibit some degree of underinsurance – something that will be steadily compounded during 2023 by the effects of soaring inflation.
This problem is magnified amongst larger enterprises, where scale exacerbates the issue of inadvertent underinsurance. In hospitality, for instance, businesses have this year been warned to closely evaluate building reinstatement values, as prospects for the sector look up after the pandemic. Analysis from broker, Lockton, shows that property damage claims are being hit hard because of international shortages in timber, steel, cement, metals and plastics, as well as a shortage of shipping containers; at a time when housebuilding and infrastructure projects are driving up labour costs. This changed operating landscape is altering the amount and value of risk, demanding a closer look at building reinstatement values to ensure they are fit for purpose. It’s an issue that the British Insurance Brokers’ Association (BIBA) considered important enough to feature in its annual Manifesto for 2022 – something that must surely continue as we go through 2023 given its “unseen but potentially catastrophic” nature. Focusing on getting sums insured right at policy inception will also help improve the claims process and outcome – the insurer’s ‘shop window’ across both personal and commercial lines.
As we head into 2023, a high inflationary environment will reduce profit margins for many insurers. In Europe, inflation jumped to 8.9% in July 2022, the highest in the last 25 years. This, according to GlobalData will hurt the profitability of general insurers into 2024, as premium growth slows and average cost per claim rises, with the greatest impact expected to be felt in property, motor and specialty lines.
It says property insurance claims are expected to grow by 6.4% in 2022 while premiums would grow by 5.6%. And in motor, claims growth is expected to increase from 1.6% in 2021 to 4.0% in 2022, whilst premium growth will decline from 6.4% in 2021 to 4.3% in 2022. Motor insurance claims are expected to rise in 2022 due to higher replacement costs, third-party pay-outs, litigation costs and wages. GlobalData also warns that the rising cost of claims will impact insurers’ claims reserves used for paying unsettled claims from previous years.
All this will prompt insurers to review their risks during 2023, which will drive an increase in premium for both new policies and renewals in some lines. For European insurers in particular, striking a balance between profitability, premium growth and customer retention will be key.