Support and Information
Over the last year, we’ve all seen a cost-of-living increase. With inflation having reached a 40-year high, we have been spending time as a business understanding the reasons behind it, the implications for insurance, and most importantly, how we can support and protect our valued customers, such as yourself.
Below you will find more information on inflation for your consideration. Our teams are also here to help, should you have any questions about your cover.
COVID-19 has led to a reduction in manufacturing capacity globally, caused by lockdowns, furlough and increased home working. Supply
bottlenecks due to factory closures, port restrictions, shipping congestion, container shortages and worker absences, are increasing the
cost and time of sourcing supplies.
The war in Ukraine
We have all seen the unfortunate scenes in Ukraine. The ongoing War continues to fuel the U.K.’s economic problems. There has been a
significant impact on supply chains as a surprising amount of imported goods come from the Ukraine e.g. the global wheat supply has
been threatened by the ongoing conflict. Sanctions placed on goods and services, connected to Russian businesses and certain individuals,
have led to further disruptions. We are also seeing significant increases in the wholesale prices of Gas & Oil, as the UK Government is
looking to source alternative supplies to those previously provided by Russia.
Inflation in the UK has increased significantly in the last year. People have suggested that this is down to our decision to leave the EU.
Brexit has resulted in the creation of new tariff and non-tariff trade barriers, which has increased the costs, delays and complexity for
cross-border trade. Due to tighter border controls and taxation, imports are more difficult to obtain, which has created supply
bottlenecks. Many different industries have had problems with a drop in labour caused by Brexit. The number of migrant workers has
reduced significantly, most notably in the care and farming industries.
Other societal factors
UK unemployment is low, leading to salary inflation. The increases in the cost of living, have also led to many workers demanding higher
wages from their employers, leading to increased industrial action across various sectors. We are also experiencing record highs in the
cost of petrol and diesel, driven by the supply chain challenges.
Claims inflation & the impact on premiums
In a period of high inflation, replacement costs are likely to be higher than expected. Also delays in reinstatement, due to material/labour
shortages as well as supply chain issues, will mean claims are taking longer to resolve. Both these factors lead to claims inflation.
Along with general rate increases, we can also expect to see large inflationary rate increases to reflect the claims cost inflation that
insurers are experiencing.
Increased potential for underinsurance
The cover you purchase needs to accurately reflect your personal/business requirements. Insuring assets for incorrect values, or setting
cover limits too low, is likely to result in underinsurance.
Underinsurance can have serious potential consequences. In the event of a claim, the average condition could apply whereby the final settlement could be reduced proportionally to the degree of under-insurance. It can mean dramatically reduced claims payments, leaving you having to find additional funds from your own pocket to finance repairs, or in the worse cases, refusal to pay claims entirely as insurers deem the sums insured declared to be inaccurate, that misrepresentation or fraud has taken place and they withdraw cover entirely.
The potential impact of underinsurance, using property damage and business interruption as an example, is shown below:
|Declared Building Reinstatement Value||Actual Building Reinstatement Value||Repair Costs following a Fire||Claim Settlement||Policyholders Shortfall|
|Sum insured declared by the policyholder at renewal||The actual rebuild valuation of the property based on a professional valuation. The property is underinsured by 50%||After a significant fire, the costs of repair are £750,000||Due to the application of Average, insurers proportionally reduce the claim figure by 50%, in line with the percentage of underinsurance||Additional cost to policyholder to find to repair the property|
Please note the reinstatement value is not the same as the market value. In summary the market value is how much the property will sell for on the open market. An insurance reinstatement valuation however is the cost of rebuilding the entire property/building in the event of a major event such as a fire, which will include the cost of demolition, site clearance, professional fees and rebuilding of the property to the same type and standard as it was before the major event.
|Policy Indemnity Period||Issues experienced during recovery||Period taken until full recovery||Claim Settlement||Policyholders Shortfall|
|12 months||Additional 12 months||24 months||Claim terminates after the Policy Indemnity Period of 12 months||Highly unlikely the business will be unable to continue trading|
|Period set by the policyholder as the maximum period perceived to adequate to recover from a major incident at the premises||Various issues arise following the incident which delay the recovery period, including delayed planning consent, lack of availability of materials and labour, longer than expected lead times in obtaining replacement machinery||Full period taken to recover from the incident. Time for reinstate of the property, sourcing and installation of replacement machinery and return to similar turnover level as that prior to the loss||Claims is closed after the first 12 months, an additional 12 months prior to the business being able to recover from the incident||As the business is not operational prior to the expiry of policy indemnity period of 12 months, the business has no additional financial support against the reduced turnover and increased costs and cannot recover from the incident|
Property – commercial & consumer
Items such as buildings, contents, stock and machinery all come under the banner of ‘property’. Sums Insured need to be accurate and correct from the renewal date / inception of cover. If these values have not been reviewed for some time, these are likely to be understated. Some examples of why property values will have increased over recent years are shown below:
- Buildings & Contents
- Building materials costs have risen hugely as a result of international shortages
- Many supplies are harder to get hold of, especially those sourced from overseas, increasing lead times
- Many reinstatement projects running overtime at a much higher cost than originally anticipated.
- Reinstatement of a property is more than just bricks & mortar. Additional costs (e.g., professional fees, site clearance/access
costs) need to be considered.
- Additional consideration is needed for listed buildings or buildings of historical significance. Specific materials and special permissions may need to be granted.
- Increased prices of replacement machinery – parts and materials are harder for suppliers to obtain. There is a shortage of skilled labour, which is pushing up the cost of labour
- Longer lead times due to supply chain disruption.
- Supply Chain Disruption – due to the difficulty in guaranteeing deliveries, businesses are having to carry increasingly higher stock levels to ensure they have enough stock in place to satisfy orders.
- The cost of this stock is also likely to be higher.
- For insurance purposes we recommend setting the sums insured at the maximum value that can be held at any one time. Our brokers can help make sure that your sums insured are suitable.
Inflation protection is present within many policies, which can offer a degree of protection against the impact of inflation e.g. index
linking, day one uplift. These are defined within our glossary of terms. These are both useful mechanisms to mitigate against the effects
of underinsurance but they do not replace for the need for the declared value to be correct from the point of commencement of cover.
The sums insured should be sufficient to cater for the indemnity period selected. It needs to represent the period from the date of the loss and extend to a point where the business has returned to the same financial position it enjoyed before the loss occurred.
- Basis of cover
- There are three main types of business interruption cover – Loss of Gross Profit, Loss of Gross Revenue and Increased Cost of Working
Cover Most relevant to Careful consideration is required to avoid Underinsurance. Gross Profit Loss of Gross Profit plus Increased Cost of Working Businesses with directly variable costs e.g. Manufacturing Careful consideration is required to avoid Underinsurance. Gross Revenue Loss of Gross Revenue plus Increased Cost of Working Businesses with few or no directly Variable costs. Based on forecasted Turnover Increased Cost of Working Increased Cost of Working. Business which are not premises dependent and continue to generate revenue if main premises are unavailable e.g. many offices and businesses were working from home has become common Limit selected by Policyholder
- The Gross Profit basis of cover requires the most thought when setting the sums insured to avoid the risk of Underinsurance. Special considerations should be made to account for: –
- Claims cost inflation
- Supply chain issues
- Longer lead times
- More expensive and scarce materials
- Please note the gross profit definition for insurance purposes is not the same as gross profit for accounting purposes.
- There are three main types of business interruption cover – Loss of Gross Profit, Loss of Gross Revenue and Increased Cost of Working
- Period of indemnity
- As well as the time to rebuild a property and replace stock, an indemnity period should also be long enough to allow the business to return to the same position enjoyed before the loss, which also means allowing for any ongoing increased costs of working to the business or regaining/replacing lost customers.
- Please note all claims payments will cease once the indemnity period limit is reached, even if the sums insured have not been exhausted. The time in which it would take for a property to be rebuilt or for a business to return to usual trading activities will no doubt take much longer than previously considered, given the impact of the current issues concerning inflation.
- The period of indemnity should allow for various factors e.g. time for insurers to accept the claim, time to source alternative premises, removal of debris, time to obtain planning permission, lead times on any replacement equipment, time to win back customers etc.
- When taking into account all of the above, it is easy to see that indemnity periods of 12 months will almost always be insufficient. We strongly recommend a period of at least 24 months is taken as an absolute minimum. Be conservative! Our brokers are on hand to help make sure that your indemnity periods are suitable.
Claims inflation is also apparent in the motor sector as the cost and duration of claims is increasing. This is likely to lead to premium increases from insurers. Some of the factors are explained further below:
- Increase in costs of claims
- Increase in cost of repairs due to inflationary increases in component parts and labour
- Increase waiting list on new vehicle leading to an increase in the value of used cars
- Increase in fraudulent claims brought on by cost-of-living crisis
- Increase in number of theft claims including parts such as catalytic converters
- Personal injury claims, especially for whiplash have been increasing in number for several years. The Ogden rate which helps
calculate bodily injury claims is due to be reviewed in 2024 and is expected to increase.
- Delay in Vehicle repairs following a claim
- Wait times for new vehicles are increasing significantly, with many vehicles stuck at ports waiting for key components such as semi-conductors.
- Supply issues on components and parts can cause delays with the repairs.
Other lines of insurance, such as directors and officers, professional indemnity and general liability, are also susceptible to inflationary pressures through rising legal defence costs and higher settlements. Liability classes often have a longer duration than typical insurance products. Therefore, the impact of inflation can be significant.
- Increase in costs of claims
- Inflationary pressures are being seen in high-value injury claims as a result of wage increases, particularly surrounding the cost of care.
- The Ogden rate which helps calculate bodily injury claims is due to be reviewed in 2024. Insurers already believe this will increase and therefore already in their considerations for the future.
- The increased costs of parts and repairs will impact the cost of Public Liability third-party property claims.
- Increases in professional fees, such as solicitors and any specialists, have increased significantly over recent years. This is impacting the cost of claims for more complex professional indemnity, management liability and cyber policies.
- The cost-of-living crisis is expected to drive further increases in claims volumes and fraudulent claims as those under financial pressures are more alert to the possibility of pursuing financial claims from employers or third parties.
- Group travel policy claims will be affected by all of the issues above, covering items such as repatriation, loss of property and personal liability.
- Increase in duration of claims
- The average time to notify a personal injury claim increased significantly during the height of the pandemic. Covid-19 continues to have a detrimental impact on hospital waiting times, leading to longer recovery times and an increase in private health care costs.
- Recessionary factors, along with the indirect consequences of Covid/Brexit, have had a negative impact on return to work times, increasing the average cost of loss of earnings claims.
- The backlog of court cases is delaying trial dates, all adding to the claims lifecycles and increasing legal spend.
- Third-party property damage inflation continues to rise post-Brexit. Material and labour shortages have increased average repair times and costs.
An appropriate limit of indemnity is more important now than ever, as well as understanding whether your limit applies per claim or for the entire policy period.
Without regular review of your sums insured and liability limits, to reflect increasing prices as well as any delays that may be experienced during the claims process, the risk of underinsurance is heightened.
We recommend a full review of all assets, and potential liabilities, and their associated sums insured. This should be done frequently, especially if there have been any changes or updates during the policy period.
For any policies that allow for a period of reinstatement, such as business interruption or loss of rent, the period of indemnity must also be reviewed. Given the current climate, the time taken to recover following a claim is likely to be longer. 12 months is unlikely to ever be enough.
There is no substitute for professional help. Insurer surveys or independent valuations can be a great way to gain comfort that your assets are insured for the correct amount. We can provide assistance with building valuation support click here for more details.
Manage and Mitigate Risks:
You can’t ever stop a claim from happening, but you might be able reduce both the frequency and severity of any claim by doing things such as:
- Regular reviews of sums insured
- Consider establishing a robust business continuity plan (BCP) or challenge the assumptions of an existing BCP.
- Review adequacy of your business interruption indemnity period to ensure it reflects the short/medium term supply chain disruptions and potential extended lead times for key items of building materials and plant.
- Periodic valuations on property and any content/valuables
- Flood & Fire Risk Assessments
- And associated action plans
- Waste Procedures and Placements
- Fire and Intruder Alarm maintenance and connectivity
- Investing in additional security for your property
- Electrical Inspections
- Risk management strategy to help reduce motor accident frequency e.g. use of telematics, use of dashboard/CCTV cameras
Understand policy terms and conditions
You must review the policy terms and conditions, so you understand what is required, ensuring you are properly protected and not inadvertently breaking any policy conditions.
Some insurers have built in inflation protection into their policies:
- Some insurers have removed Average, but we have to be careful with this,
- If a total loss, underinsurance will still be felt within the settlement
- If the amount insured is vastly different from the actual assets held, there could be an issue of misrepresentation
- BI Calculators are available on most insurer websites
- Inflation protection is also present in many policies e.g. Index Linking, Day One Uplift
Speak to your broker
We are here to help. We will look to engage with you throughout the policy period to ensure you understand the basis of cover, how to best determine your sums insured, what inflation protection is built into your policy, as well as the implications if you get it wrong. We hope to engage with you earlier in renewal discussions to give us enough time to get it right:
- Time will be needed for you to re-evaluate your sums insured
- Surveys or valuations may need to be arranged. We can provide assistance with building valuation support click here for more details.
- If relevant, your business continuity plan may also need to be reviewed
Glossary of Terms
Average is a mechanism imposed by insurers to counteract underinsurance. It makes you responsible for a percentage of any loss, proportionate to the degree of underinsurance. If a property is 50% underinsured, after the application of average, you will only receive 50% of the value of the claim.
Day One Uplift
An additional inflation protection providing a maximum percentage of uplift (usually between 15% and 50%) to the Declared Value over the course of the policy year. e.g. If the Declared Value of a building was £1,000,000 at inception or renewal and the relevant rate of inflation at the time of a claim was 10%, then the Declared Value at the time of loss would be £1,100,000. If you have Day One Uplift in place of 10% or above, the policy will cover you up to the required value of £1,100,000.
The rebuild value of the property. The bricks and mortar and everything that’s fixed to the property on the day the policy commences. It should also factor in the cost of professional fees, debris removal and any other costs. Also known as the Reinstatement Cost.
Where Business Interruption is arranged on a Gross Profit basis, Gross Profit is defined as: –
The amount by which
(1) the sum of the amounts of the Turnover closing stock, and work in progress shall exceed
(2) the sum of the amounts of the opening stock, work in progress and the uninsured working
expenses which are as follows:-
Purchases/Discounts Allowed/Bad Debts
Please note the definition is different from the accountancy version!
This is the alternative basis to Reinstatement and seeks to put you in exactly the same position after a loss as immediately beforehand, with claims being settled on the basis of deductions for wear and tear and depreciation, age and condition.
The indemnity period is the period for which claims will be paid following interruption to your business, and this is usually available at 12, 24 and 36 month periods.
Sums insured are increased automatically in line with the Building Price Index or Retail Index during the insurance period.
Where information the consumer has provided to the insurer was deliberately or recklessly incomplete or misleading.
The Insured / the business / you
Most policies covering buildings, contents, machinery and plant are arranged on this basis, i.e. new for old. Insurers undertake to settle a claim on the basis of the cost of replacing the lost or damaged property by similar property equal to but not better or more expensive than when it was new. It is important therefore that sums insured are selected taking this into account and that the sum insured must be adequate at the time of reinstatement.
Underinsurance occurs when declared values are set too low to adequately meet the policyholder’s needs. Underinsurance can result in the policy not responding as expected, paying out less following a claim than required to recover from the incident.