Inflation Information

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.

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:

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.

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.
• Machinery
  • 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.
• Stock
  • 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.

• 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.

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:

1. Regular reviews of sums insured
2. Consider establishing a robust business continuity plan (BCP) or challenge the assumptions of an existing BCP.
3. 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.
4. Periodic valuations on property and any content/valuables
5. Flood & Fire Risk Assessments
   1. And associated action plans
6. Waste Procedures and Placements
7. Fire and Intruder Alarm maintenance and connectivity
8. Investing in additional security for your property
9. Electrical Inspections
10. Risk management strategy to help reduce motor accident frequency e.g. use of telematics, use of dashboard/CCTV cameras

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:

1. Some insurers have removed Average, but we have to be careful with this,
   1. If a total loss, underinsurance will still be felt within the settlement
   2. If the amount insured is vastly different from the actual assets held, there could be an issue of misrepresentation
2. BI Calculators are available on most insurer websites
3. Inflation protection is also present in many policies e.g. Index Linking, Day One Uplift

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