Elisha Walia, Chief of Staff and Director of UK Public Affairs, Aon
The impact of inflation on the insurance industry
Earlier this year, I spoke at the BIBA conference about the impact of the cost-of-living crisis and inflation on the insurance industry. Fast forward through 2022 and the current economic environment features the highest rate of inflation in 40 years, with the expectation that this will continue to rise throughout the year.
Insurers and the industry are committed to working with the Government to address these challenges and to support customers. As large-scale institutional investors and as a vital safety net for businesses, individuals and wider society, the insurance industry has a key role to play.
The role of insurers
Most people are insured in some capacity; whether it’s a business owner who wants to protect themselves from potential disruption or an individual looking for a safety net in the event of theft or property damage, insurance is especially important during periods of economic difficulty. Insurers are actively looking at interventions to help improve customers’ financial resilience – both by looking at research and engagement, and at development of products. I know that firms will continue to work closely to promote the importance of insurance cover and protection from financial shocks, providing a vital financial buffer for our customers.
Tackling underinsurance
As we face an increasingly tougher global economic climate, more and more cases of underinsurance are being recorded, and in exposures ranging from property to business interruption (BI) to cyber.
Data provided by one of the UK’s leading valuation firms, Charterfields, showed that up until the end of 2020, more than 90 percent of companies that had undertaken a valuation to identify the cost of rebuilding a property from scratch were underinsured by more than 10 percent. The average amount of underinsurance among those companies was 41 percent. For plant and machinery, over 75 percent of businesses were underinsured by more than 10 percent, with the average underinsurance at 48 percent.
This kind of problem is given less attention than business interruption changes or flooding, but it could prove to be a serious political issue if – in the face of mounting cost pressures – more businesses and households decide that adequate insurance is a ‘nice to have’ rather than a necessity. At Aon, we are talking to clients and ensuring that their businesses have the appropriate level of insurance in place. We are also looking at the services we can facilitate or offer. For example, these could include regular valuations for building, machinery, and plant; business interruption reviews to identify and increase maximum indemnity periods; and insuring supply chains to cover risk in those vital areas.
The Chartered Insurance Institute has highlighted the importance of promoting advice and support for both consumers and SMEs – this is an example of how creeping underinsurance can happen if people are not talking to a broker or their insurer, but only interacting with comparison sites. It’s clear that a strong message for government and regulators about the benefits of advice for consumers and small- and medium-sized enterprises is vital at this time.
BIBA’s perspectives
The cost-of-living crisis is something that is high on our agenda, and we are concerned that individuals and businesses alike have started cutting back on insurance at a time when it has never been more important to ensuring financial resilience on so many levels. We will be looking at ways in which consumers and businesses can manage insurance costs without cutting corners, in particular how they can present their risk in the best possible light through evidencing good risk management practices. For example, a homeowner who has a leak detection device installed or a young driver who uses telematics. A business that can demonstrate robust controls around its IT estate is better placed to buy affordable cyber insurance. Allied to this, we are actively lobbying for a cut in the current rate of IPT and in certain circumstances a complete exemption such as cladded buildings that require remediation work where today leaseholders are faced with unaffordable premiums in some cases.
As Elisha says in her article, underinsurance is pervasive, and the problem worsened significantly during the pandemic. In 2022 the Chartered Institute of Loss Adjusters indicated that underinsurance is currently applying to 40-45% of all property claims and that the degree of underinsurance averages 35-40%. This is a significant concern as prior to the combined effects of Brexit and the COVID-19 pandemic, there had been a consistent and marked improvement in eradicating underinsurance – indeed at the end of 2018 QuestGates reported that the extent of underinsurance had fallen to around 20%. If we now add in the effect of super inflation within certain areas of the economy, notably construction, then the problem is only going to get worse in the short term.
Together with our friends at Allianz we recently published a guide aimed at BIBA members to help them better identify and tackle the problem of underinsurance. Amongst other topics, the guide looks at minimum indemnity periods under business interruption policies and the need to revisit these in light of the strain put on supply chains by both Brexit and the pandemic. The guide emphasizes the critical role that the broker plays as the ‘antidote’ to the problem. We have recently launched a guide to Valuations that we wrote in collaboration with Questgates. The new guide gives worked examples of the devastating consequences if a building or an asset is not valued regularly, especially at a time of rampant inflation. It also looks at a range of factors that can affect a valuation such as the additional costs associated with rebuilding a listed property, an ecologically efficient building or one that it is located in an inner-city area with restricted access.
