The Impact of Inflation on the Current Market

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The cost of living increased sharply across the UK during 2021 and 2022 and continues to rise in 2023.  The annual rate of inflation reached 11.1% in October 2022, a 41-year high, before easing slightly to 8.9% in March this year. 

The overall outlook for growth in the economy remains stagnant - the British Chambers of commerce (BCC) forecasts the economy will not return to its pre-pandemic size until the final quarter of 2024.  The BCC expects UK economy to avoid a technical recession but shrink by 0.3% in 2023, before returning to growth in 2024.

How are these economic factors impacting insurers?

Low growth and inflation both have a significant impact on insurers as their claims costs increase while the value of their investments decrease. Insurers are passing this economic pain on to their customers as they strive to make a profit  - focussing on rate strength, inevitability leading to an increase in premiums. 

Inflation Sensitivities for different Lines of Business

Insurance Cover	2022	2023	Explanation
Property	High	Above average	Material prices peaked in 2022 but wages still rising in 2023
Motor	High	Average	Higher cost of car parts due to supply chain issues and wage inflation
Liability	Average	Above average	Wage increases, social inflation

^{Source: data: Swiss Re}

Property Insurance

Inflation combined with supply chain delays and workforce scarcity are severely increasing property repair and replacement times and costs. For insurers these factors compound the global increase in frequency and severity of property claims due to natural disasters, making property a class of insurance that has seen very severe and rapid rating increases.

Underinsurance has long been a problem in the property insurance market, and the current environment is exacerbating this issue. It is not uncommon for property owners’ actual rebuild values to be double that covered on their insurance schedule. Similarly rebuild times have extended, and this results in the need for a longer period of indemnity for business interruption policies.

A placement challenge may present when we address the issue of under insurance. Dependent on the increase in values we may have to find alternative markets for the whole risk or place excess of loss policies mid-term due to building sums insured increasing significantly – this is due to the current market not being able to insure the full revised values.

Depending on the size of the risk Lonmar’s Property team have actively sought to pre-empt this challenage. If the TIV allows we look to spread the risk with a number of insurers on a subscription basis so we have the ability to increase capacity mid-term if required rather then cancelling and replacing or sourcing an excess layer.

Motor Fleet Insurance

Repair cost inflation has been fuelled by a shortage of car parts, beginning with the widely reported pandemic semiconductor chip shortage. The conflict in Ukraine has further fuelled this shortage as Ukraine produces 50% of the world’s neon, which is vital for semiconductor chips.  Ukraine is also a major supplier of nickel and palladium, which is used in electric batteries and catalytic converters.

These factors increase the cost of repairs and also therefore the likelihood of vehicles being written off as the total vehicle hire charges and cost of repairs exceed the replacement value.

Liability Insurance

Inflation is impacting Employers, Public and Professional Liability claims where defence costs are increasing, and “social inflation” is driving higher jury awards for personal injury claims and a shift in attitude towards litigation and awards generally. 

For casualty policies, wage and medical costs are further driving up the costs of claims.

How to secure the best possible terms in this difficult insurance market.

Ensure your clients’ Property Sums Insured, and Liability Limits of Indemnity are updated

It is vital that sums insured and limits of are up to date and accurate, so ensure your clients are aware of the the potential consequences of underinsurance. A recent professional rebuild cost assessment will give property underwriters comfort and help with securing competitive terms.

Risk Management

Ensure that clients’ risk management programmes are well documented in your broking presentation. To prepare the way for their next renewal, encourage clients to demonstrate their proactive attitude to risk by addressing any insurer survey or risk improvement requirements quickly and efficiently.

Engage with clients early in the renewal process

High quality broking presentations are particularly important in this hard market, so request the information you need early and leave time to review sums insured and cover limits etc, gather required documentation you need to prepare your presentation in good time.