Loss adjusters must use ‘skill’ to ensure sums insured are correct amid inflationary pressures

The cost of living crisis is being fuelled by levels of inflation that have not been seen for 40 years in the UK.

The Office for National Statistics’ Consumer price inflation, UK: October 2022 bulletin, published on 16 November 2022, revealed that the Consumer Prices Index climbed 11.1% in the 12 months to October 2022 – an increase on the 10.1% uptick it recorded for the year to September 2022.

Rising prices across the board have put insurance cover and claims processes under the microscope by making valuations outdated, increasing the risk of underinsurance and inflating the cost of settling claims. In addition, times of economic hardship are often associated with a rise in fraud.

Loss adjusters are on the front line of dealing with claims and play a crucial role in mitigating the ramifications of these issues for insureds, insurers and brokers.

These professionals are also seeing firsthand the impact of inflation on insurance claims.

Phil Scarrett, managing director of Woodgate and Clark, told Insurance Times: “The major impact [of inflation] has been on [the] rising costs of raw materials and cost of repairs feeding through to contractor pricing.

“Claims inflation is impacting property in particular, but we are not seeing much evidence of fraud and exaggerated claims, which one would expect from the cost of living crisis. Maybe it is because we haven’t got into the winter yet and fuel bills are yet to really bite.

“Insurers are acutely aware of the precarious financial situation faced by many policyholders - as are we - but I don’t think we’ve yet reached the tipping point.

“We may be on the cusp of change, however, as the weather starts to get colder and people need to put the heating on.”

Rising prices

The cost of living crisis is being driven by the continuing fallout arising from past Covid-19 lockdowns, the implementation of Brexit and the energy crisis resulting from the war in Ukraine.

According to Alistair Steward, director at loss adjusting and claims specialist QuestGates, these factors have combined to fuel claims inflation.

He said: “We haven’t reached the peak of claims inflation and the way things are heading currently, it could end up as bad as I’ve ever seen it in the UK.

“During 2022, this has resulted in huge increases in both labour and material costs on property claims.

“[For example,] timber costs [are] up by over 50%, plaster [costs are up by] 35% [and] roof tile [prices are up by] 25%. Labour itself is a 50% [cost] increase. That in itself is an issue.”

Index linking answer?

Insuring any property for the correct value is vital for a claim to be paid in full in the event of a loss.

In a situation where a total loss has occurred, but the total sum insured was inadequate to cover this event, then the sum insured would still likely be the maximum that the insurer will pay out - even if this is significantly less than the actual cost of replacing the customer’s property.

Underinsurance occurs when the insured has insufficient insurance cover, leaving them responsible for a percentage of the loss or expense. This, in turn, may lead to financial hardship.

In addition, if the setting of the sum insured is found to be reckless or a deliberate attempt to reduce the premium - and insurers can evidence that had they known the true value of the required insurance, then cover would not have been offered - the policy could be voided from inception.

One method of mitigating this risk is through the use of index linking, which ensures that an asset’s insured value is adjusted in line with changes in inflation, deflation and the cost of living.

Angus Tucker, managing director of Lorega Solutions, explained: “Quite a lot of policies are index linked. The index linked wording sees the policy revalued on a monthly basis against the Retail Price Index (RPI). So, it alters on a monthly basis depending [on] what inflation is.

“Even if inflation is running at 40%, the index linking clause should be increasing [insurance cover by] 40% automatically now.”

However, Tucker added that a reliance on index linking does highlight “the inadequacies caused by the sums insured being undervalued at the beginning of the policy”.

Mitigation steps

There remains a number of challenges for those setting valuations, as well as for loss adjusters reserving claims.

The biggest issue is the constant rises in prices for building materials, which are exacerbated by delays in the supply chain and shortages of skilled labour.

Tucker added: “The challenge there was the knock-on effect for business interruption (BI) claims. What should have been a seven-month BI claim become a 14-month claim, or even longer.”

In response to this particular challenge, Tucker recommended that “the main thing is to manage expectations at the outset when you’re managing the insurer and the insured”.

This includes having an understanding of “what the likely time frame is going to be, will there be delays because of peripheral inflationary issues, [or] will there be issues down the supply chain”?

To fully combat issues around claims inflation, however, a tripartite effort involving insurers, brokers and loss adjusters is needed.

Communication is key to this approach – therefore, loss adjusters and insurers have been continuously working with trade association Biba to produce useful guides on valuations and underinsurance. This work has also included workshops and webinars in an effort to get the message across to insureds.

Steward said: “We have to put the effort in to get businesses to understand that insurance isn’t just about paying a premium once a year and keeping your fingers crossed that you never have a claim.

“It has got to be about the premium being set at an adequate level in the first place based on the risk the insurer is actually taking on.

“What we do pre-loss is the key - prevention is better than a cure.

“We’ve got the skill to help businesses and brokers, so we should apply that. That’s what we’ve done this year more than anything else to try and prevent the problem.”