Mitigating Home Claims Inflation
Motor insurance may have been given most of the publicity about rising indemnity costs but home insurers face the same challenges. This article examines the causes and extent of claims inflation, what actions insurers can take to mitigate the problem and how RightIndem's eFNOL and ecosystem platform supports carriers, brokers and MGAs to execute mitigation strategies
" Direct Line also suffered the highest weather-related costs since listing a decade ago, at £149mn. Shares fell 7 per cent in early trading in London."
FT March 13th 2023
Not just DLG either as Admiral, Sabre and other carriers suffered from claims inflation. And not just a UK phenomenon; Swiss Re highlights in its 20th March 2023 report "Inflation may be easing, but claims severity pressures in P&C are likely to remain".
In March, specialist insurance consultants Procurato released an insightful report on UK home claims. They have kindly allowed us to reprint extracts below.
In the first half of the article, Procurato documents the causes and extent of home claims inflation. Procurato then concludes the article with practical advice to counter claims inflation and we highlight how RightIndem’s eFNOL platform enables insurers to achieve these goals.
The home claims market – what’s changed?
In 2022 Procurato reported that underwriting inflation increased by 13% year-on-year and rebuilding cost inflation rose by 9.6% over the same period. UK construction costs reached a 40-year high as the price of raw materials, energy and fuel rose to unprecedented levels. Insurers faced the challenge of balancing their loss-making property books and dealing with now-dated, sum-insured policies.
With 2022 having been the worst loss-making year since 2007, EY (1) has predicted 2022’s UL Home Net Combined Ratio (NCR) to be 116%, but 2023 isn’t predicted to be much better. EY projections are for circa 109%. Of course, the losses will drive a significant increase in premiums – circa 30% according to the same source – but this is unlikely to be sufficient.
Labour and materials shortages proved problematic. Skilled workers were demanding higher salaries with some parts of the UK construction market reporting a 24% increase in labour costs. The war in Ukraine created supply chain disruption for the construction sector in ways we couldn’t have imagined; materials were in short supply and those that were available were expensive.
These shortages combined to create delays in repair and, for the most severe claims, many homeowners were being put up in alternative accommodation for longer adding further cost to the insurer. These costs were often passed onto the policyholders who were also facing cost-of-living increases. Some insurance companies chose to cash out on claims in many cases overpaying yet given the sometimes-daily rise in prices this figure often wasn’t enough to cover the repairs which lead to increased complaints and claims reopening.
In addition, the UK experienced its hottest summer on record and a threat of a new significant subsidence event was imminent.
Six months on from Procurato’s last report, what’s changed? Has anything improved or has it got worse?
As well as its own research they have been talking to its clients in the insurance industry who have shared their insights on the issues behind property claims inflation.
The UK Labour Market: What is happening today?
In 2022 the great resignation was followed by the great retirement and a variety of other workplace trends which haven’t helped the labour challenges already reported. According to the Office for National Statistics, vacancies in the UK construction sector are continuing to rise. In Q4 2022 the vacancies stood at 45,000 compared to 42,000 at the end of 2021(2).
This doesn’t bode well. As Procurato’s last report indicated there is a need for an additional 266,000 construction resources to meet current demand.
Unless insurers sit at the top of their suppliers’ food chain they could face long delays for building repairs. In addition, we suggested that insurers should consider renegotiating their contracts on current market rates rather than waiting for the quarterly, or annual conversations.
So, what’s happened since?
Whilst there has been plenty of talk about creating more apprenticeships or bringing more mature, skilled employees back to the construction and insurance sectors we haven’t yet seen any signs of development. Much of that could be due to the higher levels of salaries now being demanded, in addition many have decided that retirement is the better option.
To counteract this, insurers have attempted to use contractors but availability, or lack of, is a problem with reputable firms not having either the bandwidth or available employees to fulfil the work. Lead times for contractors is increasing but that is dependent on the damage and what work and materials are needed. For example, glazing can now take up to 20 weeks even if it is a relatively simple claim.
Labour shortages (coupled with parts shortages) have seen average cycle times increase:
- Accidental damage – up to 25 days
- Fire – up to 60 days
- Water – up to 70 days
- Subsidence – up to 120 days
Safe to say, availability of skilled labour and a lack of younger people choosing construction or insurance as a career will be an ongoing challenge throughout this year and the next.
Multiple shortages in plant and machinery.
Procurato noted that suppliers in the insurance supply chain were struggling to source materials for repair. When they could find them, daily material cost fluctuations and difficulty in finding labour led to builders only confirming prices for 24-hour periods. Policyholders became savvier about the increasing prices and were renegotiating cash settlements.
Across the board materials increased in price, most significantly imports of sawn wood by 73%, steel by 60% and paint by 10%. This contributed to a rebuilding material inflation rate of 20.3%.
Has anything changed? It is still too early to know the finalised figures for 2022 but Procurato’s industry experts say that average costs have increased by 10 – 12% (building materials closer to 16%) but there have been some specific exceptions. For example, over the last two and half years glazing has gone up by 300% which has had an impact on accidental damage, theft, and malicious damage claims. Water damage claims are going up by 20% as the cost of plumbing materials also rises.
There have been large increases in brick costs (by 28%), cement (15%) and timber (10%) although these figures continue to fluctuate as 60% of all building materials in the UK are imported from the EU. Brexit and the war in Ukraine have significantly impacted availability.
One source told us that the scarcity of materials is more of a danger than the prices going up advising us, “It’s hard to source large amounts of materials, so you have to pick suppliers carefully.”
Subsidence: ‘That sinking feeling’
The big question of last year was ‘Are we going to see a significant subsidence claims surge?’
Subsidence was a rising (or sinking!) issue when Procurato last reported on it. We didn’t know whether the UK was going to experience a significant event in 2022 following the extreme heat and the anticipation of whether we’d receive the ‘right’ levels of rain. In December we experienced the coldest temperatures in years which exacerbated the issue as the water ran off the hard ground rather than soaking through gently. There were highly differing perspectives from insurers with some saying that valid claims were stable at 25% whilst others were saying 50%.
Questions were asked as to whether the repairs of subsidence years past held up or, did they fail? Did insurers address the root problem, or did they just address the (tree) roots or other issues such as drain repairs and filling and painting (rather than brick reinforcement)? The potential situation was further exacerbated by reports that suggested that up to 50% of experienced subsidence loss adjustors had been lost in the last ten years.
So, was the subsidence event worse than previous years?
In December 2022 Crawford claimed that a surge event had occurred and predicted that claim levels would be higher than the levels in 2018. They reported that new claim instructions across their client portfolio peaked at 625% of the Q1 / Q2 average (3).
Earlier indications were that the increase in subsidence claims wasn’t as big as was expected albeit in September 2022 Allianz Commercial recorded a surge with volumes 140% higher than in the same month the prior year.
As insurers look to the future, they’re expecting subsidence claims to decrease over the next five years albeit they’re anticipating they may still be worse than the 2019 and 2020 surge events. Some optimism is due to the number of new homes being built which are much better equipped to deal with subsidence, but insurers are assessing their property books and adjusting their risk appetite and pricing based on location. As an example, premiums may be higher in southeast England as the region is more susceptible to subsidence and material and labour costs are more expensive than in the north.
In addition, insurance customers are doubling down on their efforts to provide exceptional customer service and faster speed of execution along the claims cycle. One insurer told us they are in constant dialogue with loss adjustors, managing every case, doing the basics well and not taking their eyes off attritional loss ratios. As they said, “Subsidence is an event, it happens, and you can’t really stop the weather.”
To cash settle or not – that’s the question.
When Procurato reported last year that customers were opting for cash settlements, it raised a couple of challenges to this approach. The first was regarding age with younger policyholders seeing the appeal of a large cash settlement. However, if they found themselves project managing their own repairs in the face of rising materials and labour costs and without the negotiating and buying power of a large insurer, would the payment be enough? The second was the availability of builders; after all, if an insurer couldn’t use their own network to find a reputable builder how would a customer?
We’re seeing that while most insurers still prefer cash settlements customers are now refusing them on more complex claims as they become savvier to the above issues. With labour shortages in their preferred supplier network insurance companies are looking towards contractors but the availability of reputable companies is still a challenge and we’re hearing of huge delays for rebuilding or redecorating. Contractors often charge between 12 and 25% more than an insurer’s own repair networks so they’re working hard to build and secure better supplier relationships.
However, even if insurers have demonstrated in the past that they can do the work in reasonable time and for a reasonable cost that’s not always the case in the current environment. Procurato records more reports of increasing customer complaints about insurers not being able to fulfil the request.
Procurato’s own research and that of its insurance experts indicate:
- Building claims settled for cash averaging around 50% – 60% although insurer targets are at least 75%.
- Contents claims settled for cash are between 50% and 80%
- And as one insurer told Procurato, the hot topic right now is claims settled for cash are between 8% to 18% although many insurers are aiming for 25%.
There is some light at the end of the tunnel. Back when Covid hit we were told that both the number of claims and the severity of them decreased significantly. Accidental damage claims were up on small claims e.g people damaging their televisions, or carpet spills but there were less severe escape of water and fires. Now people are back at work we’re hearing that there has been a small increase in claims but not close to the numbers pre-Covid, potentially because while many are working again many are working from home more frequently.
Sum Insured Considerations
In Procurato’s last report it raised the emerging financial risk of the sum insured for existing policies may not be enough to cover the cost for rising building repairs. In addition, new regulation implemented last year has prevented insurers from giving discounts to new customers, so they have been keeping their prices artificially low which is now losing them money as a result.
As prices continue to rise insurers are facing the tough decision to increase premiums for policyholders to cover claims inflation.
But what about those existing policies? Underinsurance is an issue but as one of our insiders told us, “Insurers should be a bit more sympathetic and increase the premium a little rather than turning down the claim.”
Are insurers re-prioritising ESG?
Six months ago, Procurato said that given the challenges of finding green parts ESG had fallen down the priority order despite climate change being treated as a global emergency. The Insurance Journal reports data from AON that estimates natural disasters have caused an estimated $130 billion dollars of insured losses in 2022(5) so it is no surprise that climate change remains a key concern for insurers and policyholders alike.
We advised that green building materials can be as much as 20% more expensive than their less-environmentally friendly counterparts and the insurers Procurato has been speaking to recently say they are seeing inconsistent price rises some of which are caused by expensive manufacturing processes.
A key watch for 2023 are the new FCA obligations on climate related disclosures as well as potential new rules to tackle the so-called ‘greenwashing(6).
What else is on the horizon?
One of the biggest new challenges to come from rising inflation is the increase of fraud with some reports suggesting that customers are adding 25% to top up their claims. Although, there is no suggestion that policyholders are causing deliberate damage to their property it does appear that some in financial difficulty are pushing the price of their claims up.
To counteract the rising volume of fraud cases, insurers are developing new strategies for tackling fraud. Technology is playing much more of a part of the claims process with some insurers introducing ‘pre-photographs’ which survey the customer’s property at the beginning of a policy to determine any pre-existing issues. This is supported by leveraging metadata which can determine when and where a photograph was taken.
Other techniques include the use of video technology through apps to assess any claim, scanning of documents to make sure they haven’t been tampered with and increasing financial background, internet, and social media checks.
We’re also seeing much more collaboration between insurers who are sharing information about customer behaviours and investment in training employees to handle fraud and the associated documentation so they can look out for inconsistencies.
Another countereffect of inflation is the steady increase in complaints. Procurato notes a correlation between the higher cost of living and increasing levels of exaggerated claim values. Customers are becoming aware that sending the complaints through the Financial Ombudsman is more expensive for the insurer so this way they force them into a settlement.
With each of these responses/mitigations comes a reality – the time it takes from action to effective control (given the reliance on supplier selection, potential system integration and colleague training) can be substantial. This makes it more important than ever to provide customers the means to register FNOL digitally via the channel of their choice from their phone, tablet, or PC, whichever is the most convenient at the time. It’s never too late to start because these risks won’t abate until the cost-of-living crisis is behind us.
Where are insurers focusing their efforts?
- Lifecycle of the claim. Procurato’s industry experts say this is the most important priority for them. The longer the claim is open the more it costs the insurer, and there is an increased likelihood of customers becoming unhappy. One insurer told us that they’re aiming for a two-week completion from the first assessment to closing unless it’s a big claim such as flooding but currently the average time to settle a claim can be up to one and a half months – hence the desire for cash settlements.
- Alternative accommodation options. In the past insurers would need to block book accommodation from three to six months to get a better financial deal. With the advent of cheaper options such as Airbnb and serviced apartments, insurers are moving to a week-by-week basis which is proving more cost-effective.
- New regulation. This year there will be ‘value measures’ from the FCA in relation to Consumer Duty where they will be asking insurers to record accepted, repudiated, declined, and walk away claims. As insurers are going to be scored based on these claims they are likely to be a lot stricter on declines and the numbers may go down as a result.
- Managing costs. Challenges with dead time, not project managing the claim well (particularly through third parties) and over-scoping are causing up to 20% of soft leakage for many companies. In the wake of continued rising costs which show no sign of abating this is the one area where insurance companies can make an immediate saving.
What does this all mean in practice for insurers?
Home claims inflation shows no sign of reducing any time soon. It’s essential for insurers to:
- Review all their control measures, frameworks, and planned indemnity actions even when contracts are ‘fresh.’
- Review their supplier contracts and pricing and in some cases take active interventions with their suppliers to ensure they are buying the best.
- Find suppliers who have a large supply of materials so they can buy at a constant price in the forthcoming months.
- Increase rates for suppliers in line with market movements.
- Ensure their supplier contracts are robust, their relationships strong and their dialogue with frequent.
- Deviate from standard repair where appropriate by offering alternative solutions or cash.
- Make sure that claims, actuarial, pricing and underwriting are joined up and sharing data – if you’re already in the storm the best course of action is to weather it and plan for the aftermath.
- Educate policyholders on what to do in the event of the incident i.e., keeping policy documentation in an easy-to-find location, understanding claims processes and knowing whom to contact at the earliest opportunity.
How RightIndem helps
The RightIndem eFNOL platform helps insurers deal with the challenges discussed in this article and achieve the key outcomes Procurato lists immediately above as vital for insurers.
. Digitise self-service FNOL for customers via every channel of digital entry
. Report claims easily via the conversational style UX they prefer
. Orchestrate the technology ecosystem vital to counter fraud and estimate repair or cash settlement costs earlier
. Make better decisions faster by combining technology and automation with human skill and intuition
. To get customers from eFNOL to settlement faster
Analysis from Graham Gibson, Chief Claims Officer Allianz, and McKinsey with strategies to combat claims inflation. Commentary by Steve Gelder CEO of a major property repair contractor on what carriers must do to retain trust and supply chain partner loyalty in inflationary times.