High inflation and the impact on insurance customers

Australia is facing record-high inflation levels, with the September 2022 quarter marking annual inflation of 7.3 per cent the highest rate in 32 years1. It’s no surprise that inflation is impacting insurance customers, brokers and underwriters – but there are opportunities for greater education and support for broker clients.

Strains on supply chains, uncertainty, the war in Ukraine, and knock-on effects of the COVID-19 pandemic are all contributing factors to the current rise in the cost of living and soaring inflation rates.

Brokers need only look at asset values in vehicle insurance where, for the first time in recent history, market value is outstripping agreed value in many cases.

“It’s not something I’ve ever seen before, this sort of rapid change. Certainly, for the entire time I’ve been involved in insurance, vehicle values have depreciated,” says James Fitzpatrick, Chief Technical Officer at Allianz.

“With the extensive flooding we’ve seen in the last 12 months, one of the things that follows is the demand surge in labour and materials cost in areas where we’ve seen these natural disasters can outstrip what we would have expected in terms of building inflation,” says Fitzpatrick.

In uncertain times, says Fitzpatrick, there is an opportunity for brokers to show value and provide a calm influence and good advice to their clients.

Supply and demand adds pressure

Cameron Sheild, Strategic Risk Advisor at Lockton’s Melbourne office, has seen first-hand the impact of supply and demand on inflation.

“Obviously, as brokers we understand capital supply demand and how it impacts our market cycles. The time it has taken to arrange an assessor and various tradespeople required to complete the works in my estimate has tripled,” says Sheild.

“Delays have occurred in the process due to the supply and demand availability, and this has had a downstream impact on not only claims inflation that is passed on to the client but also the delay in the indemnity, settlement and repair losses.”

Underinsurance – a risk to be wary of

As we continue to see assets changing in price and different rates of inflation based on the interruption to the supply chain, as well as labour and energy pressures, there is pressure on replacement values for customers.

“When using averages, both clients and brokers need to be really clear on the current valuation of assets and also allow for what might come through in terms of further inflation over the year,” says Fitzpatrick.

Sheild agrees underinsurance is “high on the insurance agenda” and says certain markets are now not looking at insuring assets unless an updated valuation has been undertaken.

“Every broker needs to be asking their clients about valuations. And not only that, but as a broker, we just cannot accept the valuation number. I believe we’ve got a duty for accurate valuation disclosure, in terms of serving our clients and helping them.”

An increase in high-value severe losses

After Australians have experienced multiple natural disaster events from bushfires, hail, flooding and cyclones, the recovery inputs effect supply and demand which in turn impacts inflation.

“Effectively, what we’re seeing is an increase in severe losses,” says Sheild. “It’s not just a matter of low-value frequency losses that always occurred. We’re now seeing high-value severe losses frequently occurring.”

“We’ve seen underwriting authorities being taken away, we’ve seen the process taking a lot longer, and the underwriters themselves are under immense pressure, and the loss ratios are only increasing.”

Five ways brokers can support their clients in a high-inflation environment

1. Proactively inform your clients and set their expectations. Ensure any insurance offering is sound and appropriate, particularly examining agreed value versus market value policies in the current climate.

2.Innovate and consider how clients can manage risk. What other policy terms and conditions might be adjustable to help get the balance between risk and the cost of insurance?

3. Question your clients on all their values – property values, business interruption and indemnity periods – to ensure your clients understand the risk of undercooked values leading to a short-changed insurance payout. 4.Define your clients’ appetite for risk, and the ability to withstand inflation replacement values.

5. A broker needs to be able to understand a client’s business and risk profile to adequately procure suitable insurance. Look at property valuations, review business interruption exposure, and review their balance sheet in terms of the financial KPIs and risk tolerance.