Inflation and insurance premiums

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The cost of living increased sharply across the UK during 2021 and 2022 and while some data suggest food inflation is slowing, prices across the economy continue 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 the UK economy to avoid a 'technical' recession but shrink by 0.3% in 2023, before returning to growth in 2024.

There is much media and parliamentary interest currently on the link between consumer price rises and actual inflationary increases with major retail brands and energy suppliers being accused of using media coverage of price increases as a means of 'price gouging.' However, the link between fuel and raw material price increases and consumer inflation might be more obvious than the link between inflation and certain financial products. 

This article seeks to explain the links and offers some timely advice on ensuring your business is protected while maintaining cost efficiency. 

What is the impact of inflation on insurance premiums?

Low growth and inflation both have had a significant impact on insurers as their claims costs have increased while the value of their investments has decreased. Insurers are passing this economic pain on to their customers as they strive to maintain profitability - focusing on rate strength, inevitably 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, is 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.

Motor Fleet Insurance

Repair cost inflation has been fuelled by a shortage of car parts, beginning with the widely reported semiconductor chip shortage related to the Covid-19 pandemic. 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 are also used in electric batteries and catalytic converters.

These factors increase the cost of repairs and therefore the likelihood of vehicles being “written off” - a vehicle is typically written off when 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 protect your business

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

Insurers will reduce property claims payments proportionately to the degree of underinsurance, so it is vital to ensure property sums insured are up to date.

The best way to do this is to have a professional rebuild cost assessment carried out. This can be done cost-effectively – and is an important investment to ensure adequate cover is in place. Ask your broker to recommend a rebuild cost assessment agent. More information about property underinsurance can be found here https://www.grpgroup.co.uk/our-broker-businesses/thinking-risk/why-it-is-vital-to-ensure-your-property-sums-insured-are-accurate/

In light of the increasingly litigious and expensive claims environment, businesses need to ensure that their liability insurance policy limits are sufficient to cover their potential claims costs. If limits are breached, the insured is responsible for paying any additional costs and awards – and the potential scale of these costs can be huge.

Risk Management

Ultimately to influence insurance premiums, businesses have to reduce claims rates and help their broker demonstrate that theirs is a business which proactively manages risk. Ensure your business has documented policies and procedures, supported by effective and recorded management processes and training.

Demonstrate your business’ proactive attitude by addressing any insurer survey or risk improvement requirements quickly and efficiently. ABL Group's in-house risk management experts can provide advice and access to resources to help manage a spectrum of risk areas, from health and safety to fleet risk or disaster recovery planning.

Engage with your broker early in the renewal process

The hard market means that underwriters will focus their energy on winning and retaining risks which are well-managed, and presented clearly with all of the required information.

Make sure you engage with your broker early and provide the detail they need to help them present your risk in the best possible light.

For more information and advice contact your ABL account manager today.