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What can insurers do to combat claims inflation?

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High rates of inflation have affected everyone in the UK. Interest rates have increased, driving up the cost of mortgage payments for many Brits. Supply chain issues have caused the price of supermarket basics to increase too.

And while the Bank of England believes inflation has peaked, we might not feel the effects of a 10.5% rate in 2022 for years.

Of course, it's not just consumers who are feeling this. Insurers are facing claims inflation, where the overall cost of insurance claims increases.

According to data from the Association of British Insurers (ABI), in the second quarter of 2023, total motor insurance claims added up to £2.5 billion. That's a 29% rise from 2022 and the highest total ever recorded.

Home insurance claims have increased in cost, too - with an overall increase of 24% year on year, according to ABI data.

So, how is claims inflation affecting insurers and customers? And what can insurers do to reduce the pressure higher premiums are placing on consumers? These are the questions I'm exploring in this article.

In recent years, everything that goes into fixing a home - the materials, energy, and labour costs - has increased in price. According to the Office for National Statistics, inflation peaked at 10.5% in December 2022. With these increasing prices, the overall cost of insurance claims has gone up too.

The result is that insurers pass the cost onto consumers in the form of higher premiums. In the year to October 2023, our data shows car insurance premiums went up by 58% as insurers tried to cover their costs. Quoted home insurance prices are up by 25.7% too, according to Consumer Intelligence.

Why is this happening? It's a combination of 3 factors:

1. Inflation is increasing the price of everything

As every consumer knows, the UK is in the midst of a high inflationary period. It's causing the price of virtually everything from groceries to energy to increase - and insurance claims are affected too.

Inflation is a complex topic, but in recent years, it's been influenced by 3 main factors: Brexit, the Covid-19 pandemic, and the increase in energy prices due to the war in Ukraine.

Firstly, Brexit and the pandemic caused long-term supply chain disruption, creating barriers to international trade. In the UK, this meant that there were shortages of essential items. According to the Office for National Statistics (ONS), 23% of UK firms reported they could not get the goods and services they needed from the EU.

The same combination of Brexit and the pandemic means that there are fewer people in the labour force. According to UK in a Changing Europe, there are 330,000 fewer workers in the UK than before Brexit: that's 1% of the total workforce. Workers also need to be paid more to afford to live with higher prices, and wages have risen 7.8% according to the ONS.

Finally, energy prices are also much higher than what we've been used to over the last decade, largely due to the war in Ukraine. Average monthly energy payments have nearly doubled in 3 years, from £108 in May 2020 to £193 in July 2023. That's impacting almost every industry, even our local cafes are struggling with higher energy bills.

All these factors have raised the costs of labour and raw materials for insurance claims. The ABI mentions some of their members say average paint and material costs for motor repairs have increased by nearly 16%. Also, the cost of courtesy cars is up by 30%. This is because repairs are taking longer because garages are having difficulty sourcing parts (due to supply chain issues) and skilled labour.

As a result, every claim costs a lot more for insurers. They have no choice but to pass some of this cost onto their customers.

2. The number of insurance payouts rose massively in 2022

Alongside the overall increase in costs of labour and materials, there's another more straightforward reason that insurers are paying out more in claims: people are making more claims.

It's a trend most easily seen in home insurance. Due to a high number of extreme weather events, 2022 saw far more claims than normal. This made 2022 one of the most expensive years for insurers on record.

For example, throughout 2022, there was an unusually high number of subsidence claims, largely due to the warm weather. These added up to 23,000 claims, a rise of 69% year on year, according to Confused.com. Similarly, 3 major storms in February caused 170,000 claims worth £473 million.

In car insurance, the number of claims has increased after the pandemic, when people were driving less. According to data published in the Guardian, motor insurance claims were down by nearly half in 2020 but quickly surged back to pre-pandemic levels.

This extraordinary number of claims has increased insurers' expenses considerably. Add to that the recent inflationary economy, and insurers are being hit hard.

3. GIPP has pushed up premiums for new customers (although not claim costs)

While it's not increasing the cost of claims, new general insurance pricing practices (GIPP) are adding pressure to premiums.

GIPP was introduced in January 2022 to prevent insurers from charging different premiums for the same product and the same risk profile. GIPP means that insurers can no longer offer lower premiums to new customers as an incentive to sign up.

AS a result, premiums have instead increased across the board. Immediately after the launch of GIPP, motor and home insurance premiums spiked. But in 2023, many consumers have reached their first renewal since GIPP has taken effect. Because of these rules, customers who switch their insurance provider every 12 months might see less of a saving. But this could still be less than their renewal price, so it's still worth shopping around.

While GIPP is positive for many customers, it was introduced at a time when inflationary pressures were having a big impact on the economy.

Claims inflation is increasing costs for both insurers and customers. The bad news is that these impacts are likely to stick around into the next year and beyond. So what's the impact on the insurance industry?

Claims inflation has contributed to the worst year on record for insurers

Claims inflation is hitting insurers hard. Home insurers experienced their worst year on record in 2022.

According to Ernst & Young (EY), home insurers registered a net combined ratio (NCR) of 122% in 2022. That means that for every £1 insurers made, they spent £1.22 on claims and expenses.

As a result, many insurers are making a loss - and they think this could continue over the next few years. EY forecasts an NCR of 114% for 2023 and 104% in 2024.

There's a similar picture in motor insurance. According to EY, car insurers saw an NCR of 109.5% in 2022. EY predicts an NCR of 108.5% for 2023.

The public at large may think that insurers are making big profits, but the data tells a different story. In fact, some insurers are withdrawing specific products to remain competitive.

It's a trend we may see continue as costs stay high, meaning that there's less choice for consumers overall.

The widespread impact of inflation could be contributing to underinsurance.

Claims inflation is making customers more price sensitive (although they aren't saving as much when shopping around)

The biggest and most obvious impact for customers is that premiums are going up, both for motor and home insurance.

In some cases, prices are higher than they've ever been. As of the third quarter of 2023, car insurance prices are the highest on record, having increased 58% in 12 months. By December 2023, home insurance policies could be 30% higher than in 2022.

Customers feel the impact of these prices rises at renewal. That's particularly true when insurers are obliged to tell them what they paid last year alongside their premiums for the year ahead.

These prices are driving consumers back into the market, where they're making purchases based more than ever on price. According to Consumer Intelligence data, 66% of insurance customers who wanted to reduce their premiums switched to a cheaper policy in 2022.

Even though most consumers can save money by switching, the savings they're making aren't as significant as they once were, thanks to new GIPP rules around price walking.

These rules mean that there are fewer discounts available for new customers. So while a customer can switch to a cheaper insurance deal at the end of their policy, it may not significantly change their renewal price.

There are signs inflation may be easing. From its peak of 9.6% in October 2022, it has since dropped to 3.9% in December 2023. But the pressures of higher costs for insurers and consumers are probably not going away anytime soon.

So what can insurers do to manage this pressure?

1. Insurers can diversify products to differentiate themselves in the market

Sadly, some insurers have decided that they're no longer able to remain in certain markets.

Thankfully though, this is only a small number at the moment. Other insurers are differentiating their propositions to cater to a broader range of customers and to make themselves stand out in the market. One way they're doing this is by offering tiered products. For instance, Admiral now offers 3 levels of cover: Admiral (their basic cover), Gold, and Platinum home insurance products.

Other insurers could benefit from following a similar strategy. This can attract customers who are looking for cheaper premiums, while still offering a product for customers who prefer to pay more for the best cover. Customers who choose the basic plan have less cover, but this is preferable to being completely priced out of the market.

2. Insurers could show they're in the same boat as consumers

Insurers suffer from something of a perception issue among consumers. Consumers think that they are raking in large profits, but the opposite is true. Just like consumers, insurers in general are struggling with the impact of inflation.

This lack of understanding is an issue compounded by a lack of consumer trust in insurers. Research such as the ABI's 2020 study has shown customers have lost trust in the industry. Better communication could help insurers win back that trust.

One way insurers could improve their reputation is by being more open about the pressures of claims inflation they face. They could share that they're facing higher costs too - and that consumers and insurers can help each other through this difficult time.

Part of this could be to share concrete information about the increased costs. They could communicate this to their customers through marketing newsletters or media appearances. Ultimately, insurers aren't raising prices due to greed. They need to raise prices to remain in business during this inflationary period.

3. Insurers can better communicate the value of having insurance

Many customers don't see the value of insurance.

A great example of this is contents insurance. More than 1 in 5 renters don't have it, according to our data, even though the average household has over £50,000 worth of contents. If there was a flood or their contents were damaged, they would have to replace all their furniture, clothes, and electricals, all at their own expense. General insurers can do a better job of communicating this through their marketing and communications. They could promote engagement digitally using home contents calculators.

Marketing isn't the only way insurers can improve their perception with consumers. For instance, having representatives on the ground during major climate events, like floods, can be hugely powerful.

This happened recently in 2022, when many insurers sent representatives to areas hit by floods to assist consumers with their policies. It's a simple but effective way to build trust among consumers more widely. This is more important over the next few years, as the effects of climate change become more pronounced.

We're helping both insurers and consumers deal with the impact of inflation in a number of ways:

  • We educate customers on why their premiums are increasing. They often don't know that costs are increasing for insurers too. At Confused.com, we tell them the other side of the story through reports like our car insurance price index, as well as media appearances and social media.
  • We understand inflation can be confusing for our customers. For instance, property rebuild costs can change dramatically in inflationary moments, and this is difficult for consumers to stay on top of. If they get it wrong, they could be overpaying - or go undercovered. That's why we access up-to-date information from a reputable third party source, the Royal Institute of Chartered Surveyors (RICS). It's one way we help customers understand their insurance products and access more accurate premiums.
  • We show customers other areas where they can make savings. On the Confused.com app, we provide tools such as maps to find the cheapest fuel, MOTs, and services, and our breakdown cover calculator. We also offer customer rewards that will provide relief on their monthly outgoings, such as petrol gift cards or free food box subscriptions.
  • We work with insurers to ensure fair pricing and quality products. For example, we ensure quotes on our platform always match the prices offered when customers go through to the insurers' payment page. And if we don't think that certain products provide enough value to customers, we won't include them in our panel.

Our goal is to provide consumers with quality products and trustworthy information, while helping insurers reach more customers. We're continually looking for ways to help everyone affected by rising prices.

Both insurers and consumers are suffering as a result of claims inflation. And with higher costs here to stay, all parties will need to get through this together.

For insurers, that means building trust and making sure customers get the value they deserve from the policies they take out.

Discover more insurance trends and how we're helping the industry at Confused.com.

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