The ’massive issue’ of underinsurance will also be exacerbated

Biba 2022: The UK’s inflation rate is soaring at its fastest rate for 30 years and the insurance industry is not “immune” to its impact.

The potential “big issue” now is avoiding underinsurance among mutual clients, said Marc Lewis, chief underwriting officer of commercial lines business at Aviva.

Lewis was speaking as part of a panel discussion entitled ’Hard Market’ at the Biba Conference 2022 in Manchester last week (11 May 2022). He was joined by partner and group chief executive of professional risks at Griffiths and Armour Carl Evans, director of technical services at Bridge Insurance Brokers John Batty, commercial distribution and trading director at Axa Commercial Sarah Mallaby and  divisional director for broker at Markel UK Nic Brown.

According to forecasting firm Trading Economics, the annual inflation rate in the UK increased to 7% in March 2022 – reaching its highest levels since 1992. This equated to a 0.8% uptick compared to the previous month (February 2022).

The cost of transport recorded the biggest increase at 13.4% – up from 11.5% in February – followed by furniture and household services – up from 9.1% to 10.3%.

The Bank of England further stated that UK inflation was likely to continue rising to around 10% this year. However, it expects rates to drop back to 2% by 2024 (May 2022).

Echoing Lewis’ sentiments, Batty therefore said that inflation would exacerbate underinsurance, which he called a “massive issue already”.

Brokers on their toes

Reflecting on the factors contributing to uncertainty when providing cover to clients, Mallaby highlighted that there is a lack of knowledge on how to address inflation and manage its impact on insureds, as the “youngsters in our industry” – among others – won’t have experienced a similar economic climate.

Allianz chief distribution officer Nick Hobbs, speaking exclusively to Insurance Times, said that this lack of knowledge was aggravated by the fact that “nobody can get the talent they need for all the jobs that need to be done to service the market”, while inflation can “drive things in very odd directions”.

He explained: “Whether it’s the claims payment, or whether it’s the costs that you are supposed to be – as a broker – declaring to your insurer upfront, none of that is as clear as it was.

“Brokers particularly – and they know this already – are on their toes and need to be to make sure they gather the right information for a proper broke to the insurer.

“Underinsurance is an existential threat to a client because if you have a loss, you’re not insured for all of it, your business is bust.”

Calling collaboration

To address the crisis of underinsurance, Mallaby said that “insurers, Biba and brokers all have a part to play” in training people on how to work through the dynamics of individual risks – this could be useful if an end customer can’t afford index linking, for example.

According to broker and risk management firm ProAktive, index linking ”refers to a property insurance condition, which increases the policy sum insured at each renewal to consider the inflationary impact of changes to building costs, such as material or labour changes’ (December 2021).

From a broker’s perspective, Batty said “you’ve got to encourage all your customers to have reinstatement costs assessments on buildings and machinery.

“I think if you can secure increases in premiums through someone who is insured, it puts less pressure on rating increases alone”, he said.

Allianz, meanwhile, has “been putting a lot of collateral” into its brokers recently. According to Hobbs, this involves explaining “here’s what the inflation rate is, here’s what it is likely to go to, here are the material indices that support your discussion with your partners [and] here’s what it might mean for your customers if you are in any way not to gain the right levels in terms of underinsurance.”

“Making sure [brokers] communicate [the risk of underinsurance] properly to clients right now is absolutely key, otherwise let’s draw up another value and regulatory issue for the future.”

Evans noted that Biba are looking for takeaways – “how can they help, how can we educate each other [and] who should be doing what and where”.