Briefing: Insurers face winter of discontent as sterling adds to claims woes

By Jon Guy

If the UK insurance industry was not already reeling from soaring inflation levels, it is now set to get a battering from the continued weakness of sterling compared to other currencies across the world.

Financial information and analytics firm S&P Global Market Intelligence this month concluded that a prolonged weakened pound will only serve to exacerbate non-life insurers’ claims challenges in the UK.

The restrictions of vital raw materials caused by the ongoing war in Ukraine and the resultant effect on global supply chains has seen the cost of replacement materials and goods increase significantly.

Linked to this, the length of time before repairs can be completed has extended dramatically, pushing insurers to extend the length of business interruption periods as they struggle to complete repair work within 12 months of the insured event.

The pound’s travails have heaped more pressure - and cost - on insurers.

The UK typically imports between 70% and 80% of the parts used to fix vehicles and properties, according to S&P. Motor claims costs in the UK could, therefore, be significantly impacted by a very weak currency.

The only small silver lining is that the UK imports many of its car parts from elsewhere in Europe and the pound has fared better against the euro than the dollar. The pound fell to €1.115 on 28 September 2022 and has since recovered to €1.141.

Tough times ahead?

While the costs arising from this situation are immediate, an obvious remedy is not.

Although insurers can adjust their rates to accommodate increases in the cost of repair materials by charging higher premiums, there remains an obvious lag because insurers cannot impose the necessary rate adjustments until a policy comes up for renewal.

However, there could also be some benefits from a weaker currency. Fuel costs are linked to the dollar and rising fuel costs tend to reduce car use and associated motor claims for insurers.

But this is a small comfort for the insurance industry in the current climate.

At a time when the UK is avoiding a recession by the skin of its teeth in recent months and the economy is struggling against insurance fraud - in particular, an increase in arson claims - the optics of insurers refusing or delaying claims payments is the last thing the industry needs following the public relations disaster around Covid-19-related business interruption claims.

With nationwide fears over power backouts due to energy shortages and widespread industrial action, the UK is bracing itself for a winter of discontent.

Insurers may also be steeling themselves for an uncomfortable winter season.