Briefing: Cost of living crisis causing spike in accidental damage claims

By Editor Katie Scott

Despite the Office for National Statistics reporting a slight dip in UK inflation on 18 January 2023 – with the Consumer Prices Index (CPI) rising by 10.5% in the 12 months to December 2022 compared to an increase of 10.7% in the 12 months to November 2022 – the cost of living crisis is still present and correct for many Brits.

Daniel Casali, chief investment strategist at wealth management firm Evelyn Partners, explained: “Another slowing in annual inflation – the second since October’s peak of 11.1% - will add to the newfound sense of optimism in the UK economy, triggered by last week’s surprisingly positive monthly gross domestic product (GDP) growth data.

“But, these are fairly marginal decelerations in prices. Inflation remains elevated and, together with likely negative annual GDP growth in 2023, this remains a risk for both markets and households.”

Aligning with continued inflationary and cost of living pressures has been an associated uptick in domestic accidental damage claims, according to exclusive data from loss adjusting firm Sedgwick that has been shared with Insurance Times.

Between February and October 2021, Sedgwick noted that the number of accidental damage claims it was involved in had increased sixfold.

This trend is further cemented by more recent stats, where Sedgwick recorded a 344% growth in accidental damage claims requiring further investigation between Q4 2021 and the end of Q3 2022.

The company confirmed that this “notable increase” in domestic accidental damage claims “can primarily be attributed to the impact of the cost of living crisis and, as such, we would not expect to see a slow down in this activity in 2023”.

Trend setting

The main target of these accidental damage claims, according to Sedgwick, is “small electrical items”, such as “phones, laptops and TVs”.

This is because “these items can be seen as easy options for claimants seeking [a] quick cash settlement, as the value is low and [these types of claims] historically would not necessarily warrant significant investigation or validation”.

Sedgwick continued: “Once [a claim has been] cash settled, there’s no way of confirming if a replacement [item] was ever obtained, [or] if [the replacement] was legitimately required.”

Another area Sedgwick is seeing increased claim activity is the accidental loss of valuable jewellery.

“We’re seeing a similar increase in the accidental loss of luxury watches and high value jewellery. This is an area we’ll also be looking to track closely through 2023.”

Opportunistic fraud potential

The challenge for personal line brokers and insurers around accidental damage claims on small electrical items is the fact these are ripe for opportunistic fraudsters to take advantage of – with everyday costs still biting many households, exaggerating a genuine claim or submitting a new claim when policyholders may not have chosen to do so in the past could appear harmless on the face of it.

Sedgwick noted: “Part of the challenge connected to this increase in opportunistic fraud is the public perception of claims fraud.

“It isn’t uncommon for individuals to self-justify a false or deliberately increased claim as a ‘reimbursement’ of premiums paid over a number of years - particularly if there’s been no previous claims history.

“As we know, this activity drives up the cost of insurance for all, so the short-term gain of a cash settlement may ultimately be outweighed by the additional premiums payable.”

For example, Sedgwick warned about claims related to items that are “outside of their initial warranty period, as it’s common for repairs to exceed the value of replacement” – especially as these goods tend to have “a relatively short lifespan”.

Sedgwick added: “There’s also the potential for claims to be presented for items which may not have been in use for some time and may have just been faulty – old televisions, for example.”

Lastly, Sedgwick has “seen evidence of policyholders making repeated claims using similar items, or circumstances such as damage caused by a child or pet”.

“In these cases, the alleged culprit is unable to provide any account of the damage and a decision on settlement must be reached on limited information,” the firm continued.

Revealing the ramifications

The appetite for opportunistic fraud from insurance customers could be set to continue if economic predictions become reality.

For example, PricewaterhouseCoopers’ (PWC) UK economic outlook: Predictions for the year ahead 2023 bulletin, published on 23 December 2023, estimated that real wages in the UK will fall back to their 2006 levels this year – approximately £34,600 per annum.

The professional services firm also predicted that cost of living pressures will continue to intensify throughout 2023, with weekly food shop costs rising to £100 - double the rate recorded at the turn of the century.

Barret Kupelian, senior economist at PWC, said: “2022 has obviously been a highly challenging year [for] the UK economy and it is not surprising that these chilly headwinds will continue throughout 2023, bringing with it some unwelcome milestones in terms of economic and social wellbeing measures.

“While UK real wage growth has been sluggish since the global financial crisis [in 2007 and 2008], inflationary pressure will see UK workers face a significant hit to their wages in comparison to their peers in France.”

Amid these pressures, brokers and insurers will need to stay on their toes to nip opportunistic fraud in the bud – educating end customers about how seemingly ‘harmless’ tactics such as exaggerated claims can impact on premiums is vital and an area where the industry needs to step up.