Rising material costs prompt underinsurance warning

The UK insurance industry is buckling under the soaring price of raw materials, which is threatening to plunge millions of policyholders into an underinsurance black hole.

The huge surge in demand for building materials and motor spares as the world emerges from the Covid-19 pandemic, coupled with pressure in the global supply chain and Brexit ramifications, has combined to create a shortage of raw materials, in turn leading to significant, cross-sector cost increases.

According to Steel Market Update, a website and events business for the North American flat rolled steel market, the price of hot rolled steel quadrupled between September 2020 and September 2021, moving from $500 (£375.17) per ton to $1,855 (£1,391.90).

In November 2021, online roofing product sales platform Roofing Megastore also revealed the results of its research on building materials pricing.

It found that in the year to October 2021, imported, sawn or planed wood saw a 74% price rise, while fabricated structural steel experienced a 73% growth in costs.

The cost of particleboard, also known as chipboard, increased by 65% in this reporting period too, alongside the price of concrete reinforcing bars climbing 62%.

These price increases have been felt in the rising costs of claims across a wide range of property and motor classes - while insurers have been seeking ways to mitigate such price hikes, industry commentators have warned policyholders that they are facing the prospect of their policy limits becoming insufficient to meet the costs of rebuild or repair.

Short-lived price guarantees

Chris Clement, commercial director at H&H Insurance Brokers, said the broker has been working closely with its clients after recent claims have highlighted this price problem.

“We are seeing clients with claims which are breaching the sums insured due to the rise in the costs of materials,” he explained.

“Steel and wood are the key issues at present and while it has calmed down a little in recent weeks, the problems remain significant.

“When estimates are being obtained, we are having cases where the supplier is saying they can only guarantee the price for 48 hours as they simply do not know whether the price of material will increase.

“Timber prices have risen by 60% to 70% and while things are calming, the price of materials is still so much higher than they were a year ago.”

He added that H&H Insurance Brokers has been looking to undertake an education programme with its clients, to raise awareness of the threat posed by underinsurance. This is also a conversation that the broker is having with every client at renewal.

“We had a recent case where we explained the issue to the client and looked to increase the limits on the policy to reflect the rising costs,” Clement explained.

“However, the client did not like the premium quoted by the insurer due to the higher limit and sought to revert back to the previous limits.

“I am pleased to say both [the insurer and H&H Insurance Brokers] made it clear we could not support underinsurance and the policy could not be written at the lower limits.

“Insurers are aware of the issues and are working with brokers to address the problems. We need to ensure that we do not store up problems for the future by failing to ensure that policies cover the costs of rebuild or major repair.”

Closing down the claim lifecycle

Insurers are working on both internal and external solutions to reduce the costs of parts and materials, while also examining ways in which they can speed up claims settlements - despite the ongoing issues with the global supply chain.

For example, Colin Davies, head of supplier services at Allianz Insurance, said the insurer is working to ensure that clients are not adversely affected by the current stresses in the claims process.

“Supply chain disruption is pushing up the prices of materials and parts,” he explained. “Steel, timber and concrete [prices] have risen sharply. What’s more, driver shortages are delaying deliveries from plants to sites.

“In this context, we need to keep claims lifecycles as short as possible to maintain customer satisfaction and contain costs. That’s why we are taking these issues very seriously.

“We’ve been working in partnership with our providers and suppliers to make sure we have continued access to the materials and parts we need to process claims. The supportive relations we’ve built with our long-term partners are making a huge difference.”

Furthermore, “some of the initiatives we launched for environmental reasons are proving helpful in terms of supply chain”, Davies added.

He continued: “To deliver sustainable claims, we’ve been prioritising repairs over replacement and supporting the use of green parts.

“As a result, our supply chain is more local and cyclical. Whereas [environmentally] friendly solutions used to be regarded as more expensive, they’re now proving cost effective.”

Aviva concurred that the effects of the rise in material costs is being felt within its claims department too.

“We are seeing inflationary pressures across our supply chain,” a spokesperson revealed.

“Our key focus is making sure we can still be there to support our customers when they need us - therefore, we have put in place a number of measures to ensure we minimise any impact to our customers.”

Direct Line Group’s (DLG) chief executive Penny James used the underwriter’s third quarter update, published on 9 November 2021, to reveal that rising costs of second-hand vehicles had seen the insurer’s motor claims increase by up to 5% - despite lower claims frequency.

“Prices [for used cars] are several thousand pounds higher than they were this time last year,” James said.

This price hike in the cost of used cars has come as a global shortage of semiconductor chips has badly impacted the production of new vehicles. These chips are typically used for elements such as navigation control, infotainment systems and collision detection tools.

James added that DLG has been able to partly mitigate the impact of rising vehicles values through the use of its own network of bodyshops.