The past few months have seen renewal premiums increase significantly, well
beyond the norm that we have previously been used to. We wanted to share
some background on current claims inflation and the reasons why policyholders
are seeing such significant increases in premiums at renewal.
This guide intends to offer additional information and support for our clients’
inevitable questions around increased premiums
Claims inflation is the change in the average price of materials and labour used in repairing and rebuilding a property following damage.
Various factors are contributing to the recent upwards trend in claims inflation which, in turn, is resulting in higher index linking figures than seen in recent history.
Index linking is the method used by insurers to increase Buildings
and Contents sums insured at each renewal to allow for the
effects of claims inflation, and to ensure that customers are not
left in a position where they are under-insured.
Most insurers index link sums insured according to inflation as
measured by BCIS (the Buildings Cost Information Service) which
is a rebuilding cost index calculated for the ABI (Association of
British Insurers).
As you can see from the table to the right, the index has increased
steeply in recent months
Numerous industry and societal factors have impacted on claims inflation:
• Brexit
o New rules for cross-border trade have added cost, complexity and delays to the supply chain
o Many Europeans returned to their home countries, or elsewhere, and are unable or unwilling to return due to changes in immigration rules, causing labour shortages
o Added bureaucracy and the decline in value of the pound have made working in the UK less attractive for EU nationals, further adding to the workforce issues
• Covid
o Lockdowns, furlough and self-isolation reduced manufacturing capacity globally
o Lockdown also created a huge surge in DIY projects, adding unprecedented demand to the supply chain, driving up the cost of materials
• Societal trends
o UK unemployment is low, with the resultant high number of vacancies driving increased salaries
o Record highs in the cost of petrol and diesel, driven by the supply chain challenges
o Longer lead times in the supply of machinery and plant, as a result of the above challenges, further exacerbating supply chain issues
Combined, these industry challenges continue to drive up the cost of building repair and re-construction, both in the UK and globally, with little respite expected in the overall supply chain before 2023
General inflation takes into account other items, such as food and household bills. Whilst these items undoubtedly face significant pressure due to supply chain issues within those industries, and are contributing to the cost of living issues we all face, the increase in cost of raw materials used in construction are wholly unprecedented, at closer to 20%
No, index linking is an essential tool used to protect the financial interests of clients against the effects of inflation. We feel it is imperative that clients are not left in a position where claims costs are not met, due to a property being under-insured against the true costs of repair and/or rebuilding
We hope this guide provides some useful points that aid understanding of the
claims inflation issue affecting the insurance industry. It is vital, we feel, that
clients are given sufficient information to understand what portion of any premium
increase is added for their own protection against the financial impact of potential
under-insurance.
