Claims Inflation: Why are my insurance premiums increasing?

May 26, 2022

Across the insurance industry, we often see articles regarding the hardening market cycle, largely due to an increase in natural catastrophes around the world. However, there is one item that is often not discussed in great detail, which is claims inflation.

Claims inflation is the increase in the cost of claims payments, predominantly around goods and services. When an insurer suffers a large loss, they often set a claims reserve (the amount they expect the claim to settle for in the near future). This process of reserve setting is vital for their planning and budgeting, however, one of the greatest challenges is being able to monitor the adjusted cost of goods and services from year to year.

How does Claims inflation affect me?

If we focus on Property Insurance for this example, for the good part of a decade, insurance companies have been able to predict the average cost following a significant storm claim.

In 2020, a claims reserve estimate for a building, may look like the following:

Metal Roofing $3,000, Gutters $1,000, Timber beams $1,500, Labour $1,000

Total cost = $6,500

Now in 2022, we would see the following estimates:

Metal Roofing $4,500, Gutters $1,500, Timber beams $3,000, Labour $2,000

Total cost = $11,000

 

Therefore, the claims inflation costs have risen by $4,500 (69%).

 

In addition to building material increases, we are still noticing supply chain delays and labour shortages, once again causing further claims cost inflation.

Using the above storm claim example, previously a Home insurer may have paid for temporary accommodation costs for 1 week while finalising repairs. Currently, some repairs are taking 6-8 weeks to finalise, causing the insurer to pay for additional accommodation costs for an even longer period.

 

When will these premium increases end?

As we cautiously monitor the insurance market and wonder when the insurance companies will stop passing on premium increases to their customers? We simply need to watch the claims inflation costs, which acts as a good compass as to what knock-on affect they will have to any future premiums.

 

What can we do to keep our premiums down?

As your insurance broker, we will continuously work with you to obtain the most competitive option available for your insurance, however there are also additional measures you can implement to improve your insurable risk.  Here are some examples:

Property Owners – Conduct regular maintenance checks on your roof and clearing gutters to avoid rain build up.

Car Owners – Installing a dashcam to assist in recording the events of a claim.

Business Owners – Create a Disaster Recovery Plan (DRP) and a Business Continuity Plan (BRP). Both of these will help minimise the costs in the event of a claim.

 

What are some other insurance tips?

Given the significant delays we are seeing in obtaining building materials, we are recommending all our customers review their business interruption cover. Previously, most commercial property owners would have a 12-month indemnity period, to cover their lost income while their building is repaired or re-built.

Due to these delays, we are now recommending each customer increase their indemnity period to 18 or 24 months. This will ensure their business can continue to survive after a major loss to their property.

 

If you would like to discuss any of your specific insurance needs, please feel free to contact one of our Insurance Consultants today.