The impact on claims and the supply chain

As global inflation triggers supply chain delays and chronic labour shortages, it’s imperative that clients understand what this means for insurance claims.

The crippling, flow-on effects of high inflation are being seen in the soaring cost of goods and services, in tandem with limited availability, leading to increased complexities and lengthy delays for claims resolution.

The impact of the supply chain difficulties affecting businesses across the globe continues to have a significant impact on claims. Port closures, labour shortages and COVID-related delays – not to mention the war in Ukraine – mean that supply is stifled, and the wait for goods to be received – and claims to be resolved – can be lengthy.

Head of Claims at Gallagher, Adam Squire, says that supply chain challenges are particularly noticeable in the case of vehicles, for example. “Spare parts are increasingly difficult to source, so even longer wait times are unfortunately a reality. If the car is a necessity for people’s livelihood, they’re faced with an even bigger problem.” Supply chain issues across the board create an economic climate where it’s vital to review the value assets are insured for.

Squire encourages brokers to seize the opportunity to really look after clients by anticipating their needs and guiding them to adopt the added protection they need to counter the effects of high inflation.

“Setting the sum insured can seem like a straightforward paper exercise but becomes a complex consideration once shortages come into play. When it comes to the crunch of lodging a claim, that’s where the rubber hits the road, and you see how well your broker has advised you. Well-informed recommendations will pre-empt make-or-break outcomes for your client and make adjustments accordingly.”

Reviewing cover to account for supply chain challenges

There’s nothing worse than having to go out to inform a client they’re drastically underinsured once they’ve suffered a loss, so using current supply chain challenges as a lead into the conversation is a smart way to tackle it.

Luke Smith, Head of Property Short Tall Claims for Allianz, says, “Sharing the bad news about rising replacement costs is a far easier conversation to have while there’s the opportunity for the client to update their cover. You might start by asking whether they’re following the news and the impacts that things like the war in Ukraine are having on the global supply of commodities.

“Be well informed enough yourself to help them grasp the tough cycle this has triggered, whereby it’s taking more time to process claims, and the levels of cover they’ve had in place may no longer be adequate for their needs as the costs of materials and labour continue to climb.”

Ramping up risk advice

This is a market that compels brokers to become risk advisers to their clients.

A short supply of materials and labour means that rebuilding costs have gone through the roof, and it’s necessary for business owners to think about the right level of cover.

Sally Coulton of WTW explains, “Brokers need to be having early conversations with clients about their declared values. Insurers will pay particular attention to ensure correct replacement values are being declared. Given inflation and supply chain shortages, brokers should also recommend that clients obtain professional valuations.

“It is important for clients to ensure they won’t be prejudiced in the event of a claim by co-insurance clauses in policies if they have underdeclared their values. In the current economic climate, a review of policy sums insured may be required to cater for a rise in values and confirm they would have adequate protection for a significant loss.”

Have customers who’ve been wise enough to take out business interruption cover accurately anticipated what it will take for them to keep their business going for an extended period, at inflated running costs?

Provisions for leasing alternative premises or loss of profit may fall short if their current level of cover was calculated prior to the current supply chain challenges. “Indemnity periods are critical for clients, taking repair and rebuild challenges – which can be difficult and lengthy – into consideration,” says Coulton. In prior years these periods may have been sufficient but may now need to be increased to ensure adequate business interruption protection is in place. We are seeing widespread time delays that are occurring for reinstatement works.”

For brokers, it’s about helping clients balance cost considerations with an appetite for risk.

“It all comes back to early engagement with clients,’’ Coulton says. Brokers need to gain a full understanding of their clients’ businesses and tolerance for risk. Only then, can a broker suggest higher risk retention options to consider, if containing premium expenditure is required.”

Ultimately, as this inflationary environment continues into the foreseeable future, together with other geopolitical factors, the global supply chain will continue to prove challenging.

By ensuring clients’ insured values are accurate, and provision has been made for supply chain delays, brokers can help reduce the potential impact the supply chain may have on the resolution of claims.

Key takeouts for brokers

1. Global events are putting even more pressure on supply chains, with costs increasing and some goods being in short supply – therefore, a review of insured values is essential.

2.The reality today is that the time it takes to fulfil repair work is being lengthened by supply chain delays, so reviewing the length of coverage clients have for, for example, business interruption is vitally important. One year may no longer be adequate. 3. Make sure you’re well informed about the factors impacting the global supply chain – it will help when having conversations with clients.

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Allianz and NIBA gives no warranty and makes no representation that the information contained in this publication dated December 2022 is, and will remain, suitable for any purpose or free from error. To the extent permitted by law, Allianz and NIBA excludes responsibility and liability in respect of any loss arising in any way (including by way of negligence) from reliance on the general information contained in this publication or otherwise in connection with it. The contents of this guide are protected by copyright. © Allianz Australia Insurance Limited (ABN 15 000 122 850) and National Insurance Brokers Association 2022.