Ongoing inflation continues to prompt concerns about financial stability and operational impacts to insurers and the broader business community. In response, the Bank of England has issued letters to Chief Actuaries of general insurance firms, highlighting the urgent need to address claims inflation, solvency risks and increased vulnerabilities.

Ashley Easen, Risk Consulting Director, Gallagher Bassett UK, comments on the rising inflation costs and what this means for insurers in the following thought leadership piece:

With the UK’s cost inflation rate reaching 8.7% in June 2023, insurers are now grappling with the daunting task of managing claims costs in a rapidly changing and inflationary environment. Influenced by various social, economic and geopolitical factors, insurers can no longer rely solely on historical claims data for accurate reserving and claims adjustment.

To help insurers tackle these critical issues and maintain compliance, Gallagher Bassett has developed a comprehensive risk and claims cost guide.

Three key insurance lines are most affected by inflationary pressures:

• Property
• Motor
• Personal injury.

Understanding these key areas of vulnerability, insurers can proactively adapt their strategies and ensure they are well-equipped to navigate the evolving landscapes of the insurance industry.

Property claims’ inflation significantly impacts sum insured and settlement costs. General price increases can be attributed to factors such as the availability and cost of labour, availability of materials, and inflationary pressures in energy and haulage costs. The COVID-19 pandemic has exacerbated these issues, leading to supply chain disruptions, increased demand following project delays, and a shortage of construction workers. The combination of these factors has led to significant challenges in the property claims arena, driving up costs for insurers and policyholders alike.

The COVID-19 pandemic initially caused a substantial reduction in motor claims. During the lockdown period, motor insurers reported a 70%-80% decline in claims, which benefited them but adversely affected the accident repair sector. As traffic volumes returned to normal, motor claims started increasing again, although potentially to a lesser degree than before the pandemic due to unknown factors like differing driving patterns and behaviours.

Inflationary pressures also affect personal injury claims. A recent case heard in the Coventry Combined Court addressed the impact of inflation on awards for Pain Suffering and Loss of Amenity (PSLA) in personal injury claims. The court recognised the significant increase in inflation levels and decided that the brackets for PSLA in the Judicial College Guidelines (JCG) should be adjusted accordingly. The drop in the value of money since April 2022 necessitates an approximate 12% increase in the JCG figures. This change in circumstance due to inflation will impact the assessment of damages and the offers made for PSLA. Insurers will need to consider these inflationary factors when assessing claims to control indemnity spend.

To mitigate the impact of inflation on claims costs, insurers can adopt several strategies:

1. 1. Early intervention can help lower overall claims costs
   2. Improvements in data analytics enable better-informed decisions
   3. Prompt and efficient claim settlements minimise costs
   4. Effective risk management practices can influence premium rates.

Ashley Easen Director Risk Consulting  Ashley_Easen@gbtpa.com