The biggest headaches in personal lines

Ask most people in the general insurance industry what the problem lines are currently and the words “household insurance” are unlikely to be far from their lips.

The recent freezing weather is too recent for  industry-wide statistics to be available, but anecdotal evidence of burst pipes is overwhelming – not to mention storm damage to roofs and the impact of weight of snow on agricultural buildings.

Loss adjusters Crawford & Company reports that this February claims from one client had given rise to a month’s worth of work in only three days, and other clients had seen claims volumes triple and even quadruple.

Bad as the “Beast from the East” was, it was nothing like as bad as the last burst pipe epidemic in 2010/11, which saw one and a half million homes affected.

 Crawford’s head of escape of water Iain Salkeld says: “The current event is quite a sizeable one in the market but intake on burst pipes started to subside very quickly in terms of bad weather-related claims. Things started returning to business-as-usual levels after a couple of weeks.”

Not just a freeze issue 

But even these business-as-usual levels have been giving household insurers plenty of headaches because escape of water had become a major issue well before the recent freeze.

ABI figures released last November showed that in the first nine months of 2017 domestic escape of water claims cost £483m – 24% more than in the first nine months of 2014.

Mark Barlow, managing director of IFM Insurance Brokers, says “It’s not all due to burst pipes. In particular, the water systems in place in residential properties involve more modern materials, and I would estimate their failings could account for at least half of escape of water problems.

“In old houses the drainage system under the sink would be made of copper piping and would be soldered or have a joint with a screw top. But any house that has had a refit in the past two decades would probably have plastic pipes push-fitted together, which are less robust.” 

 A significant lack of mobility in the housing market is another contributory factor. People are building extensions instead of moving, and they are equipping them with increasingly costly goods. Kitchens, in particular, are becoming more about status and lifestyle than about simply cooking food.

Prior to the 1980s, most homes only had one bathroom, but it is now common to have ensuite bathrooms and separate shower rooms. Usage of central heating and water-bearing appliances like washing machines and dishwashers has also rocketed.

Dan Simson, head of home insurance at Direct Line, refers to recent research amongst bath showrooms which show that in the last 12 months alone there has been an 85% increase in demand for rain showers – showerheads with a wide spread. Other fashionable watery additions include free-standing baths (80%), heated towel rails (77%), separate baths and showers (76%), tiled-in pipework (73%) and twin sinks (65%).

He says: “The increase in multiple toilets and sinks means more complex plumbing is required and households are at an increased risk of leaks. We are seeing more claims than ever, as fashionable bathrooms with tiled-in plumbing mean issues go unidentified for longer, and subsequently repairs are more expensive.”   

In perspective

Nevertheless, some insurers feel that current escape of water problems are nothing untoward and point out that there haven’t yet been any significant premium increases in the household insurance market.

William Quibell, head of major and compliance loss, claims and supply chain at Legal & General, says “I don’t believe there is a problem with household but there are some challenges. We are in a very competitive market and there is some uncertainty with claims trends, but escape of water is allowed for in our business model.

“We look over the long-term cycle and try not to react to short-term shocks. There will be inflationary pressures across the market this year but the extent to which insurers choose to absorb them is their own choice.” 

Furthermore, whilst insurers acknowledge there is no silver bullet for dealing with escape of water claims, they point out that there are still a number of steps they can take.

Hiscox, for example, reports that it has been training staff to spot the risks early and to be up to date with more modern drying methods. It has been hosting round tables with loss adjusters and others in the supply chain and has also been exploring the use of leak detection technology. 

Keeley Davies, head of property claims for Hiscox UK & Ireland, says: “It’s very early days with leak detection technology but we have been trialling some and I feel the future for such devices is promising. I can see a time when all households might have one.”

Motor insurance

In fact motor insurance is arguably still more of a problem area. According to the ABI, the average motor premium paid in 2017 saw a 9% rise to a record high of £481.

Michael Lawrence, personal lines director for LV= Broker, believes that accidental damage claims have been just as significant a driver as personal injury claims, due largely to advances in vehicle technology. 

Sensors in windscreens, LED headlights, automated braking systems, crash avoidance systems and reversing and parking cameras in bumpers are singled out as being amongst the major culprits.

Lawrence says: “Previously these things were only on high-level cars, but over the past one or two years they have become much more standard on new ones. All sensors are integrated with vehicle systems, so they need specialist knowledge to repair them, which makes it very expensive. It can cost £2,500 just to repair a headlight.

“The systems are reducing the frequency of accidents but increasing the costs of claims. Only motor manufacturers can currently recalibrate these systems but repair costs will come down once the garages themselves have the technology to do it. The hope is that most garages will be geared to doing so in three or four years’ time when older types of cars become a rarity.”

Technology is also causing similar problems in the commercial motor insurance market, where Allianz reports double digit inflation on both accidental damage and third party damage claims.

Jonathan Dye, head of motor insurance at Allianz, says: “Both are impacted by advancements in vehicle technology and the associated cost, plus the devaluation of the pound against other currencies, which means that parts and paint are now costing more to import for repairs. We have also seen over a 20% increase in the frequency of theft claims as criminals use sophisticated methods to bypass vehicle security systems.” 

Additionally, for both individual and commercial motor, Brexit could have an inflationary effect on repair claims. 

Nigel Teasdale, partner at law firm DWF, says: “With 80% of replacement vehicle parts coming from Europe, the Society of Motor Manufacturers and Traders has suggested that leaving the EU could add 10% to servicing and repair costs. Brexit could also see body shop labour costs rise, as the available pool of talent inevitably shrinks.”

Personal injury claims

Nevertheless, personal injury claims also continue to be a major thorn in insurers’ sides. According to the ABI, although they fell slightly in number during 2017, their average cost of £10,816 in its final quarter was the highest quarterly figure since the second quarter of 2016.  

 Theresa May’s decision to call a snap election last June certainly hasn’t helped because it caused a significant delay to the introduction of the Civil Liability Bill, which contains significant measures to tackle whiplash problems and to review the Ogden personal injury discount rate, which has served to push up motor premiums over the past year (see page 18). However, the bill has now been put before parliament, and is due to come into law in April 2019.

Mark Hudson, head of counter-fraud at law firm Horwich Farrelly, says: “The stated aims will have a significant impact and potentially it won’t be worth claims management companies trying to fight for motor whiplash claimants. Without claims management companies there probably wouldn’t be much of a problem for insurers as a lot of people would never have claimed if they hadn’t been pestered to death and misled.”

Crash for cash and ghost broking continue to be major problems although the Insurance Fraud Bureau (IFB), which hasn’t produced any relevant statistics for a couple of years, thinks there has been a slight improvement in both. 

Pastures new

However, even if fraud is virtually eradicated in the motor market the fraudsters will almost certainly find rich pickings in other lines of insurance. They are already starting to do so with employer’s liability and public liability –  arranging fake slips in the workplace and in supermarkets and on public pavements – and in property via inflated claims from contractors.    

Ben Fletcher, director of the IFB, says: “At the moment crash for cash is accounting for around 50% to 60% of our work, ghost broking for around 30%, and the remainder concerns the same criminal gangs going into these other areas. 

“We don’t know how bad these other areas are yet but in the last few weeks we have launched a new analytics platform that will be able to quantify the problems. This time next year I expect a far bigger proportion of our portfolio to be in liability and property.”