In recent months, I’ve had lots of conversations with clients about the rising cost of insurance. In particular, those who haven’t made a claim want to know why they’re receiving renewal quotes with a double-digit hike in the premium. Often, the answer is market forces, so let’s unpack that in more detail.
Before getting into specific market forces, one overarching driver is tax. Insurance premium tax was introduced in 1994 and used to be charged at a standard rate of 2.5%. It now stands at 12.0% making it a significant contributor to your overall insurance spend.
Property insurance
Figures from the Association of British Insurers (ABI) show that during the second quarter of this year, property insurers paid out £1.4bn to homeowners and businesses. This is the highest quarterly figure since the ABI started collecting the data in 2017 and is up by 16% on the previous quarter.
Many factors are driving this jump in claims costs. The cost of materials has risen in recent years, while labour charges have also jumped significantly. The Covid-19 pandemic and Brexit both combined to disrupt supply chains, and the impact on cost and lead times for certain products continues to be felt.
Figures from the consultancy EY found that in 2022, insurers paid out £1.22 for every £1 they received in home insurance premiums, highlighting the difficulties they face. To plug the gap, insurers have had to increase premiums, and not just for people and businesses who’ve made a claim. Everyone has felt the pinch.
Liability insurance
There are similar inflationary pressures impacting insurers in the liability market. The ongoing rise in wages is outstripping inflation. Figures from the Office for National Statistics show that this summer the annual growth in employees’ average regular earnings (excluding bonuses) was 5.4%. In contrast, annual consumer price inflation stood at 3.1%. This means that the value of liability claims settlements that include loss of earning is going up faster than inflation, putting pressure on insurers to increase premiums.
Anecdotally, there’s also a rise in the number of people who are making claims against previous employers, although they don’t necessarily have evidence to support their claim. In some cases, this is simply due to poor record keeping. In others, it points to claims that are spurious, at best. No matter the veracity of the claim, insurers still have to investigate it and even those they successfully defend creates cost. And to counter this growing number of claims and rising cost base, premiums go up.
Regulatory pressure
As a broker representing clients, I see an increasing need to challenge insurers decisions and make a point of only working with carriers that will provide the level of support needed when a loss does occur. But I also believe that in some instances evolving regulation is costing clients dear.
For example, in a bid to make pricing fair for everybody, insurers can’t offer loyalty bonuses to longstanding customers. This is partly a problem of their own making, because in the past too many insurers were putting prices up unreasonably at renewal. The need to offer the same pricing to new and existing customers at renewal for the same risk deals with this issue, but it also stops rewards being applied to some accounts.
Elsewhere, the Financial Ombudsman Service has shown its concern about insurers using the application of average clause. What does this mean? Well, if it would cost £100,000 to rebuild your property but you only buy insurance with a rebuild figure of £80,000, you’ve only insured 80% of the total potential loss.
The application of average clause states that if you’re underinsured, the insurer can apply the percentage to which you’re insured to any claim. Thus, the policyholder above making a claim for £50,000, would only receive £40,000 – 80% of the total claim.
Nobody wants to see policyholders left out of pocket in the event of a loss. But if insurers have to provide cover that goes beyond what they’ve contractually agreed, then they’ll simply see their claims loss ratios rise and put up premiums across the board.
There’s no excuse for insurers trying to wriggle out of meeting their obligations and as a highly reputable broker, our sole focus at Keegan & Pennykid is to ensure clients get the financial and logistical level of support set out in their policy. But if some clients are allowed to get significantly more than they’ve paid for, then it impacts on everyone in terms of rate hikes.
Insurance is a complex business and making sure you and your organisation have the right level of cover in place can often be an intricate process. Taking the time to complete this process accurately will ensure you have the cover you need; while investing in understanding and improving your risk profile will also pay dividends. It will help you reduce the chance of suffering a loss and ensure you’re better able to cope with any that arise. It will also enable you to negotiate more effectively for the most competitive premium available and seek out deals that tie in rates for two and even three years.
Rises in premium aren’t just a reflection of any claims you’ve made. But it is the case that the best understood, and most carefully managed risks get access to the widest cover and the most competitive prices available at the time of renewal.
If you have any queries or would like to talk to us about a specific aspect of your insurance needs, do please get in touch with us here at Keegan & Pennykid.
