Some underwriters glaze over at the mention of claims inflation, says David Williams. But it’s more important than ever
As a former underwriter, I was disappointed by a conversation I had with a number of underwriters at a recent market function. We were talking about what they were expecting in terms of claims inflation.
Apart from the fact that the very mention of claims inflation seemed to make them glaze over, they seemed to want to distance themselves from the whole subject. I’m happy to say these were not AXA colleagues, or I think I might give up right now.
Despite the lowest Bank of England interest rate of all time, claims inflation is an incredibly important subject for all insurers. It is definitely something to watch this year and beyond.
Starting with the basics, I know quite a few companies will simply aggregate together the combined impact of changes in frequency and movement in average cost and call that claims inflation. While this is much better than nothing, now is not the time to lose focus on that split.
We are in a recession and it’s worsening, so we need to know what the impact will be. Taking just the property classes, we know we are going to see more claims, which will arise from a number of factors.
Fraud will be a growth area, both in terms of complete fabrication, staged damage and exaggeration, and we will inevitably see more large arson losses, which have a huge impact in terms of the average cost of claims.
As people and businesses struggle to make ends meet, smaller incidents, which would not have been reported in previous years, will be put to us as claims.
So frequency will undoubtedly increase, although the extent of the rise will be affected by the length and depth of this recession. Burglary numbers doubled in the last recession. I wonder who has priced that into their products for the year ahead.
The increase in the cost of claims is much more difficult to predict. You could argue that we may see a lot more claims, but of a smaller nature, so the average cost might go down.
Conversely, customers might spend more time and effort detailing every item, and argue much more vociferously, so costs actually rise.
The arrangements we have in place and our philosophies on settlement will also have a huge impact. I must admit to being rather pleased that we never really cracked that “repair network” issue in line with some of our procurement plans. “We can secure agreed rates for years to come” was a suggestion that sounded quite good at the time but, compared with the terms we and our customers can now negotiate in the open market, we would have inadvertently prejudiced ourselves.
What about the “cash settlement is simplest and best” insurers? Will they fare better?
Probably yes in the current climate, but only if they change some of the nuances. Training is vital for claims handlers who have not worked through a recession before. They will need to understand completely different repair/replace benchmarks for comparison or it’s quite likely to cost them much more than it should.
It will also be interesting to see whether different claims models – such as those used in much of Europe – might provide better ways of managing rising costs.
In Spain, for example, there seems to be an endless supply of contractors at cheap labour rates. In France, all domestic property claims are settled on a do-it-yourself basis. This is not negotiated down from a contractor’s estimate, but based on great tools that calculate how much money the policyholder will need to spend in the local DIY shop and how many hours he or she will need to spend paint brush in hand.
Some UK firms have tried a similar approach, but customers have been resistant. Perhaps a time when money is really tight will provide the trigger to embrace something different.
That said, people in the UK seem to expect higher payments on claims they know they will repair themselves than those I’ve seen settled in France, so will that expectation prevent a change?
If that is the case, perhaps we need a low-cost product for DIY settlement on claims up to a certain figure, with an agreed mechanism to calculate cost. If we can offer this at a lower price, it could prove popular in these difficult times.
So, in a time of recession and historically low interest rates, claims inflation requires more attention not less. A bit of thought on this sadly neglected area might actually get us considering new products.
David Williams is managing director of claims at AXA Insurance