After Ross Walker's very useful summary of where we are with UK inflation: at 6.7% in early September 2023, and down sharply in October to 4.6% compared to the government CPI target of 2%, we collectively discussed the dynamics impacting unprecedented claims inflation, and compared notes about what we're seeing in the market at the moment.
Insurance inflation has been trending higher than consumer inflation and has generally been more volatile. So, what's behind it?
Cost of living crisis
The current cost of living crisis is thought to account for an all-time high in new claims. Policy holders are thought more likely to resort to insurance claims when times are bad, whether genuine or fraudulent, especially property and motor claims. Furthermore, insurance companies are seeing old, previously closed claims re-open, elongating the claim lifecycle, incurring more costs in settling the claim.
Rising insolvency rates
Recessionary pressures and rising insolvency rates have further compounded claims inflation. 2023 has so far seen the highest number of insolvencies since the banking crash in 2009, driving up D&O claims and professional indemnity claims especially. Some of this is partly driven by the pandemic economic policies now catching up with businesses, which at the time were given cheap loans and financial support, kicking the can down to road and delaying the inevitable.
Employment and wages
Wage inflation has been trending upwards and has had a particular impact on the services segment of the economy, including insurance, it has begun to moderate, and is expected to ease further in 2024, but remains elevated close to 8% y/y. Meanwhile, the rate of unemployment has begun to rise (4.2% from a recent low of 3.5% in summer 2022) added to financial strain on the economy, thus contributing to the increased likelihood for consumers to depend on insurance policies in times of need.
There are a number of dynamics in the property market, pushing claims inflation upwards. Together, the rising number of large, complex claims, exacerbated by the rising cost of construction materials for repairs and replacements and lack of trades specialists, have made claims more expensive and take longer to resolve. We have seen this in the ongoing cladding crisis, where initial claim volumes are plateauing, claims are now being driven from the cladding replacement process and supply chain, and a similar trend is expected with reinforced autoclaved aerated concrete (RAAC) remediation, except the costs are 25-30% higher.
We are also still seeing the impacts of the Stamp Duty Land Tax (SDLT) holiday, which inevitably gave the housing market a boost and an increase in conveyancing and a greater proportion of professional indemnity claims against conveyancing firms.
The court backlog is at an all-time high. Problems in the court system are causing severe delays to claims, contributing to claims inflation. We are seeing hearings vacated at the last minute due to lack of judicial availability or court space, which is increasing costs as matters are being prepared twice.
Similarly, and whilst this was not seen universally, some had seen an increase in litigants in person which results in more delays to resolving claims and more costs. Although the fixed costs regime will give certainty to insurers, and may well price London-based firms out of lower value litigation, it may also be that the new fixed costs regime increases the number of litigants in person, again increasing costs and delays.
Our discussion would not have been complete without a brief mention of Brexit, in which we established that its impact on the economy and the insurance industry has been less of an economic shock than both the global pandemic and the war in Ukraine. Whilst Brexit has led to an incremental structural change and has impacted supply chains, costs of goods and shipping, both Covid and the situation in Ukraine shocked the global economy and eclipsed Brexit. Notwithstanding that, we expect to see a slow gradual and continual negative impact as a result of severing key ties with the EU.
We also considered the approach that insurers are taking with regard to reserving. Given all of the above, claims values are going up and insurers are reviewing reserves across all of their books, including increasing reserves on long-running matters, reviewing the IBNR reserves and accounting for the additional legal costs.
Matt Reynolds, Partner and financial lines specialist at DWF said: "We wanted to create an opportunity for friends and clients from the North of England to come together to network and discuss pressing issues in insurance. Ross Walker's inflation scene setting provided the context for an open and honest discussion about the challenges the insurance industry faces today with regard to claims inflation. We were delighted that so many clients joined us, engaged in the discussion and stayed to catch up with colleagues and friends."