Liz Booth analyses the effects of inflation on both insurers and their customers
Property and casualty insurance carriers should be concerned as inflation continues to run hot throughout the global supply chain and is likely to increase the cost of claims for auto, physical damage, property and catastrophe lines of business for years to come. The insurance ecosystem may be in for a rough ride this year because of the growing threat of social inflation affecting liability lines of business.”
Those were the recent words from business adviser RSM. But it is not just insurers feeling the pinch – consumers are too. The post-Covid hangover caused a strain on supply chains across the world and prices were already on the rise. But now, as Allianz warns, the Ukraine-Russia war is making the situation far worse.
Allianz recently wrote: “The invasion of Ukraine will propel Europe’s already high energy prices even higher. We expect at least a 30% increase in the energy bill for 2022, hitting low-income households in the UK and Germany the hardest.
“In the worst-case scenario where energy supply is partially cut and energy prices increase by an additional 70% (20% probability), disposable income for the average European household would be cut by an additional -2.5 percentage points. This would bring the total cost to more than -4 percentage points in the UK and Germany, equivalent to an additional cost of more than €1,200 (£1,029) per household.”
It is the same worldwide. Speaking in the US, Mohamed El-Erian, chief economist adviser at Allianz, says consumers will be struggling with inflation in the coming months.
“We are looking at a cost-of-living crisis. That’s what we are looking at for the next two quarters, three quarters, where the consumer is going to be hit hard by inflation, they’re going to get hit hard by lower consumer sentiment,” he warns.
In the UK, Peter Blanc, president of the CII, suggests: “Insurance brokers and financial advisers have to navigate this new landscape and make sure that clients continue to achieve excellent outcomes.” In his comment in this issue of The Journal, he stresses the need for insurers and brokers to ensure their clients are properly covered – and notes that this could lead to some uncomfortable conversations at renewal.
Dr Matthew Connell, director of policy and public affairs at the CII, says in a new CII Radio podcast: “Inflation isn’t always even. We have got employment shortages in some sectors, so the price of labour is going up a lot and so costs are rising in some sectors more than others. The price of raw materials is going up in some areas but not necessarily right across the economy. It is quite a complex picture, so the expert advice of a broker is essential here.
Insurance brokers and financial advisers have to navigate this new landscape and make sure that clients continue to achieve excellent outcomes
“Also, firms themselves are facing different risks – 30-40 years ago, cyber would not have been thought of but now it is one of the biggest risks. So, for firms to unpack what their risks are and how much needs to be insured or how much they can mitigate in other ways than insurance – all of this is advice that a broker can provide.”
David Perry, managing director of FSB Insurance Services, which serves the Federation of Small Businesses, adds: “It is a difficult time for small businesses – in fact it is a perfect storm for them. They are coming out of a time of immense uncertainty and now facing increased costs for their materials, and they need to increase their sums insureds to keep pace, which adds to their premiums. It is pretty tough.”
He points to the construction industry as one of those hardest hit. “People may have started a project nine or 10 months ago but because of hyper-inflation they are now underinsured.”
The other major concern, he says, is business interruption. With issues in supply chains, it means people with a serious loss may have delays in getting back to business as usual. “We haven’t got a handle on it yet, but we are concerned,” he says.
Graham Gibson, chief claims officer at Allianz UK, admits: “There is not much that keeps me awake at night, but this is one topic that does.
“Look at some basic costs – the cost of second-hand cars has gone up at least 25% in the last year.
If you are talking about white vans, then it is about 30%-40%. The cost of timber has gone up by 350%-400% in the last year,” he says, all of which means the costs of deliveries has had to increase too.
He stresses that insurers and brokers have a real duty to make sure their customers are aware of what is going on and to ensure sums insured are correct. That might mean as much as doubling sums insured, he warns.
Ultimately, the group agrees that it could also result in a change in the shape of insurance renewals – no longer is a once-a-year review of insurance sufficient if customers are to remain properly protected.
Without a more frequent review, Mr Perry suggests, the danger is that the insured will find they are only insured for half the cost of the claim. As Dr Connell concludes: “It is so important that insurers and brokers have regular contact with their clients.”
Liz Booth is contributing editor of The Journal