The current ‘perfect storm’ of macroeconomic conditions could lead to an increase in fraud, arson and claims costs, says Allianz chief claims officer Graham Gibson. Direct Line Group only recently canceled its dividend payout leading to the resignation of CEO Penny James.  

Other headwinds that could hit the UK this year include the continuing cost of living crisis, the unknown ramifications of China deserting its strict zero Covid strategy, and the impact of the UK government ending its energy bill support scheme in March 2023.

Gibson told the Insurance Times: “[This year] is going to be tough - we’re expecting a bit of a crescendo moment.

“There’s [a] lot of data coming out that people are relying on credit. We’ve got mortgages moving [and] the taxation burden is going up by an average of £831 this year.

“It creates a perfect storm. I’m worried about a crescendo point where all this comes together at once.

Claims inflation is also expected to continue through the first half of 2023, although it may ease in the second half of the year as supply chain issues hopefully begin to abate.  Zurich's CEO Mario Greco believes that is the case.

 “Claims costs seem to be moderating themselves, they seem to be coming down,” Greco said of the squeeze on retail, adding that the market was coming back to a “better balance” as prices increased to absorb higher claims costs. This year, retail will “start recuperating margins”.

FT  9th February 2023

Nevertheless, Zurich came in below analysts' expectations with a flat COR of 94.3% for its Property & Casualty business. Allianz Chief CLaims Officer Gibson has a more pessimistic view.

Gibson explains: “Very sadly, claims inflation has been significantly higher than inflation itself.

“We are reliant on fuel prices - whether it be [the] fuel usage of our repairers or our inspection engineers on the road.

“Repairing cars is energy intensive. One of our group repairers said that pre-Covid, their energy bill was £100,000 a month - that went up to £400,000 a month because they don’t get the benefit of government relief. It demonstrates the rate of inflation we are seeing in the insurance world.”

Procurato's article published on 6th February asks a very good question: -

Motor claims inflation. Still a hot topic? 

"Supply chain disruption, labour and material shortages, as well as increasing energy prices, have been cited as the main reasons in addition to new rules implemented by the Financial Conduct Authority which bans insurers from charging more to loyal customers.  There’s little doubt that claims inflation is going to continue rising as we progress through 2023."

Procurato continues "How has this impacted the auto industry? According to the Institute of Motor Industry (IMI), a shortfall of 160,000 workers is predicted in 2031 and they are claiming this is because of an aging population (and fewer younger generations entering the sector), decreased immigration and the green agenda(3). Steve Nash, chief executive of the IMI, said the industry is facing 'its biggest skills challenge of the last two decades'.   

A challenge certainly whilst managing a repair network is a potential competitive differentiator as Liam Farnell of DLG states.

"Those with high-performing internal motor repair solutions will have a continued competitive advantage at this time. Those Partners with excellent, transparent KPI's and data will continue to win and retain the insurers' trust and business. Whilst challenging times, it’s a time to observe your supply chain and partnerships and the value derived from that area as great learnings are to be had for the future. Digital efficiency and those that have invested to date do well to reflect on the key decisions made to push the Digital agenda and are better off as a result. In the end, it is the sum of the parts that matters!"

 Procurato has much more to say so follow the link above for its insights.

Property insurance claims face similar issues of course. Last year I reported on a major contractor to the UK insurance and construction industries in Home Claims, Industry Challenges and the role of Technology discussed at 'I Love Claims' Conference .  

Steve Gelder warned carriers not to take contractors for granted and to collaborate on the challenges both parties faced.

Home Claims Challenges are interlinked and include:

  • Covid on staff, mobility, and economic impacts
  • Supply chain restraints and delays internationally and nationally
  • Materials and components shortages and backlogs
  • Price inflation on goods, materials, and labour
  • Large projects still playing catch-up
  • Climate change, severe weather damage and claims resilience
  • That specific UK issue- Brexit

The CEO of the Gelder Group (Insurance Repair and Renovation & Construction) , Steve Gelder, painted a picture of how these factors interlink and impact contractors, insurers, policy holders.

Take tradespeople who are leaving contractors and specialists to take advantage of increase labour rate offered elsewhere. They can get more money elsewhere and it is so much harder to retain vital skilled people. Sub-contractors are just about coping but squeezed by labour and materials price inflation, difficulties making cash as debtor days extend and more money tied up in extended work-in-progress (WIP). Many are reducing their insurance exposure making matters worse for home claims.

Schedules of Rates- always more dynamic in the UK compared to the USA- are obsolete as price inflation rockets and instability will extend into 2022. Cost-plus pricing becomes a norm and claims price inflation is rampant.

Gelder has set a policy to deal with those companies his people can respect, like and trust.  New customer or supplier? Think again. That has an enormous impact for the insurer’s supply chain team.

Gelder had a dramatic image to share- the number of touchpoints for a property claim which seem to have multiplied and create confusion, delays, and extra cost. Pity the poor Contract Manager he said- the worse job in property restoration and repair.

Gelder asked insurers to: -

  • Reduce the number of people managing each claim
  • Dynamically update the schedule of rates
  • Deal in fact (reliable data)
  • Improve payments timing
So how to plan to counter these challenges?

McKinsey published a timely report recently; What P&C insurers can do as claims inflation pressures results in Europe.

It highlights where claims inflation has hit most and the difference between the top quartile of carriers and the bottom quartile in dealing with EOW claims in UK.- 13% lower indemnity.

McKinsey proposes three key steps to manage claims inflation more effectively

Tracking on a granular level

Claims leaders should ensure the claims business tracks key data on management dashboards.

  • Underlying inflation. This is reflected in the rising consumer price index (CPI) and higher labor costs. Inflation has always been an issue, but right now, it’s especially high, more spontaneous, and more frequent (Exhibit 3). Underlying inflation contributes an estimated 45 to 50 percent (end of 2021) to the total claims spending increase, but the contribution has increased over 2022.
  • Claims composition. Changes in peril mix and claims composition are driving increases in claims costs, accounting for 40 to 45 percent of the total. This is mainly due to the greater severity of accidents and shifting economic parameters around losses. The increase in incidences of theft plays an additional role—possibly driven by the economic downturn in combination with the higher resale value of vehicle components.
  • Risk mix. We’re seeing shifts in underlying risk factors and mobility, which make up 5 to 10 percent of the claims cost increase mix. Vehicles are becoming more expensive as new technologies proliferate, and we’re seeing a higher concentration of claims in urban areas as mobility patterns change (consider the rise of street scooters, for example).
  • Policy changes. Changes in policy distribution, such as the increase in comprehensive policies in recent years, contribute even further (1 to 3 percent) to the rise in claims costs.

Tactics for immediate impact

  • Reduce supplier spending. Start by renegotiating contracts with repair networks to share cost pressures, redistributing repairs to areas with lower demand, and redesigning business rules to increase remote inspection.
  • Redesign decision engines for optimal settlement. Show the changing cost and availability of labor, parts, and replacement solutions—for example, update spending thresholds for repairs to achieve capacity faster and mitigate the increased cost of replacement vehicles.
  • Implement incentives for customers. Ensure behavioral alignment with customers to make the settlement process more efficient.
  • Launch focused anti-fraud actions. Review current fraud prevention actions and implement best practices to realize quick wins; historically, we have seen increases in fraud in times of economic downturn.
  • Share claims insights within the organization. Improve the quality of insights by integrating detailed data on cost evolution and share internally to define short-term product adjustments.

Strategic actions to counter long-term inflation effects

Aside from pursuing immediate actions, CCOs can implement certain steps to counter long-term inflation effects. The following can potentially mitigate the loss ratio increase by approximately 3.0 to 3.5 percentage points, depending on the individual starting position:

  • Define supply chain strategy. Examine the benefits of vertically integrating or defining a partnership model with vendors, possibly helping suppliers upskill their workforce.
  • Boost the use of green parts. Increase the share of green parts used, as this can reduce both repair cost and repair time significantly, while saving valuable resources that would otherwise be needed to manufacture a new part.
  • Improve the performance and valuation accuracy of salvage and recovery. Keep track of market developments such as secondhand-vehicle prices and adapt valuation models.
  • Holistically transform the end-to-end claims journey. Implement AI/machine learning solutions to optimize decision making in situations with constantly changing factor costs and to improve productivity (countering long-term salary inflation).
  • Jump to a higher level of fraud prediction. Map fraud patterns onto economic distress periods and invest in AI-driven fraud identification across domains.

To use a structured approach, claims executives may want to consider organizing the steps above into two categories of action

One thing holding back these levers can be the current claims technology in place. If you don't have a cloud-native, micro-services architected, API-rich platform that can be customised for all perils, not just motor and home, then you are maybe constrained too much.

In that case, look at one of the newer but mature and scaled-up claims platforms like RightIndem that help deliver the immediate and long-term actions required. Deployed with carriers like esure, The AA, and NN Group. 

Give me a ring to find out more

Yes- I must declare an involvement with RightIndem.