The impact of claims inflation explained

Rampant inflation was one of the stories of 2022 and 2023, not just in Australia but in many of the world’s economies.

While its effect on hip pockets has been felt regularly at the supermarket checkout and the petrol pump, it’s also been one of the factors responsible for driving an upward trend in insurance premiums, says Procover Professional Lines Manager Jayson Grossman.

This is because insurers also feel the impact of inflation on goods and services when it comes time to settle claims. Claims inflation refers to inflation that has pushed the cost of claims higher than what insurers originally reserves.

What is the outlook for claims inflation in 2023? 

Jayson says that while inflation in the economy may be peaking, economic growth and unemployment remain low. As a result, he says claims inflation is likely to continue to impact insurers, and the flow-on effect may continue to be felt by purchasers of insurance.

However, when it comes to premium increases, Jayson says a two-tiered market is emerging.

“Those professions that insurers consider more exposed to producing severe claims will still receive premium increases wherever possible while more benign, better-performing professions are likely to see flat to slightly falling premiums.”

Which classes of insurance are most affected? 

Jayson says that property insurance has felt the impact of claims inflation, with supply issues related to construction materials, labour shortages and rising energy costs all driving up claims costs.

Long-tail insurance classes, including professional indemnity and liability in general, will also continue to face sustained exposure to claims inflation, which will be especially notable for clients in construction, engineering and real estate professions.

How are insurance companies and underwriting agencies managing claims inflation? 

“Long-tail claims can take several years to settle and are often complex, relating to an injury, property damage, design errors, breach of contract or similar. Therefore, the efficiency in managing claims and developing strategies to reduce claim life cycles to mitigate costs becomes important,” Jayson says.

“Underwriters face similar challenges, balancing the need for premium increases with customer expectations and the risks of undervaluation and underinsurance.”

What can brokers do to help clients? 

Given the economic environment and the potential threat of recession, Jayson says brokers play an extremely important role in helping their clients navigate these challenging and ever-changing times.

“With the cost of living, utilities and interest rates rising, the impact of insurance premiums, not just for financial lines, but holistically, is a financial burden on many households and businesses. This is when the knowledge and market intelligence of a broker comes to the fore, for example with advice as to looking at cost-effective alternatives while maintaining limits and high levels of coverage for their clients.”

Here to help 

If you’d like more information on claims inflation and its impact on your client’s insurance cover you can call us on 02 9307 6600 or visit our website to find the contact details for our underwriting team.

Procover Underwriting Agency Pty Ltd (an AR of Miramar Underwriting Agency Pty Ltd) acts under binding authorities as agent for the insurers of the product under a coinsurance arrangement between certain underwriters at Lloyd’s and HDI Global Specialty SE – Australia.