We recently shared an article about the alarming rise in motor claims inflation, unfortunately the story doesn’t end there as our attention now turns to home claims. The scenario is identical, labour challenges, parts and supply shortages and increased costs due to a variety of external factors. In addition, those one-in-ten-year weather events are becoming more frequent, from floods to the unseasonably hot summer we experienced this year, they’re all adding to insurers’ costs and now subsidence claims are on the rise. So, how are insurers addressing these challenges and what do they need to be doing?
Inflation in home claims has become one of the biggest challenges for the insurance sector this year. According to recent data from the Building Cost Information Service rebuilding cost inflation for the UK is estimated at 9.6%. UK insurers that we have been speaking to have indicated that underwriting inflation for 2022 has risen as much as 13%. This coupled with the need for insurers to balance their loss-making property books means that policyholders could be looking at significant increases for this year and beyond as insurers attempt to pass these costs on.
This inflation increase comes as UK construction costs reach a 40-year high [Footnote 1] and given the cost-of-living crisis – impacting the UK and much of the western economy - and continual increases to the price of raw materials and energy, inflation looks set to continue its rise.
External factors are having a significant impact. The impact of both Brexit and the pandemic have exacerbated labour shortages. Many European workers headed home causing a severe shortage of labour in both the haulage and the construction industries. Increased fuel prices mean that it is costing a lot more to transport goods with manufacturers and haulage companies putting their prices up accordingly.
It's not just the haulage industry, there are also shortages of skilled workers in the construction sector and those that are available are demanding higher salaries. Randstad stated that the average pay packet for construction workers increased by 14% in 2020. In some parts of the UK construction firms have reported they are paying 25% more for labour costs to attract the skilled tradespeople they need, just at a time when there is a global increase in demand for construction.
Then just six months ago we were taken by surprise by the war in Ukraine which has added further stress to parts supply. In addition, it’s led to rising energy costs which increases building costs. For example, using wood and steel to produce parts uses significant energy. Sanctions against Russian companies and an unavoidable lack of production in Ukraine has caused further challenges in the supply chain. Construction economists at Arcadis have revised their tender price forecast and are predicting inflation of up to 10% - up from forecasts of 5% just three months ago. Arcadis says that “the Ukraine war is single-handedly responsible for adding a further 3-5% to the costs of most construction projects.” This is further exacerbated by ongoing shipping delays, whether that’s because of closed routes or because of pandemic-related container availability.
Then there’s the weather. According to the ABI UK insurers paid out £500 million to homeowners who suffered damage during February’s Dudley and Eunice storms and this summer we saw the hottest summer on record with the mercury hitting over 40oC causing a new surge of subsidence claims. Insurers have got to be more prepared and agile to deal with these events – the frequency is only going to increase.
And finally, there’s the shift in customer behaviour. According to the UK Home Insurance Market Report 2021, the rise of people working at home significantly changed the nature of reported claims. The severity of household claims decreased but as the desire for home improvements increased so did the claims for escape of water and fire. This is because consumers were looking for more space in their homes and adding basements and second bathrooms, however more often or not those properties were never designed for those levels of structural change.
Whilst the outlook doesn’t sound positive, there are ways for insurers to mitigate the challenges. We’re going to explore how.
Source : (Unsplash]
The UK Labour Market: What is happening today?
Since the UK officially left the European Union on 31 January 2020 all-sector vacancies have doubled according to the ONS (638,000 – 1.27m in August 2022). As with many other industries, construction and others associated with home repair are experiencing significant labour shortages. The ‘Great Resignation’ is in play as construction workers are being tempted into new-build as opposed to repair and insurance work due to the high salaries that are on offer. With the UK Government pushing for more new-build properties this is only adding to the pressure of finding and then keeping building repair workers. This challenge comes fresh on the back of the UK exiting the EU and the pandemic which drove a large volume of skilled European workers to return home due to uncertainty. The pandemic alone led to 92,000 construction workers leaving the industry and high volumes of claims workers leaving for similar or less stressful and less regulated roles at similar or higher pay.
Recent data indicates that 266,000 additional construction resources are required to meet current demand and according to the Office for National Statistics there are 42,000 listed construction vacancies. That’s 60 per cent higher than Q4 2019 just before the impact of the pandemic and the UK’s exit from the EU.
Whilst it’s reported that the construction industry is working hard to build the long-term capacity of its labour force it may be too little too late. There has been a lack of investment in apprenticeships in recent years which means that average ages are increasing in the construction field. One supplier we have spoken to said the average age of their workforce was 55 years’ old. Even with new initiatives it is going to take considerable time for that benefit to filter through. These challenges are also impacting the availability of skilled, experienced loss adjusters - demand is currently quoted at more than 130% of available capacity.
These labour shortages and the challenges faced by home repairers to recruit means longer lead times for building repair work to be completed. If a homeowner has been forced out of their home, with flooding for example, this could mean the insurer will need to provide longer alternative accommodation driving costs up even more. It’s vital that insurers know where they sit in the food chain of their suppliers, if they’re at the top they’re in a great position, if they’re not, then there could be trouble ahead. Insurers need to be all over their suppliers in claims, the supply chain and procurement. In addition, they need to ‘own their rates’, it’s important to be renegotiating based on current market rates and not just waiting for the quarterly or annual conversation.
However, there is one potential upside that insurers should be aware of. With many home owners completing building works during the pandemic and with rising mortgage rates – thus reduced requests for extra borrowing – more capacity may become available something insurers should capitalise on.
Overall though, these issues are not going away any time soon and insurers need to plan for the volatility around these shortages and delays whilst also considering what their customers want.
Multiple shortages in plant and machinery
It’s not been an easy couple of years for insurers in the property market and as things stand it’s not looking to improve any time soon. The combination of the pandemic, Brexit and the Ukraine war is causing huge problems across the supply chain. Climate change and new regulations are having their own impact. Traditionally the insurance and repair sector have been able to buy parts and materials cheaper than the public but because of global shortages it’s all become a bit of a land grab and the prices are higher.
And when those claims come through, suppliers in the insurance supply chain are struggling to source materials for the repair. To address this some insurers are cashing out but if an insurer can’t find a builder or suppliers who can access machinery and parts, how will the customer? Whilst it may seem the easy option it could have a hugely negative impact on customer satisfaction.
Some insurers are choosing to cash out but if an insurer can’t find a builder how will the customer? We’ve heard that many insurers are over paying on cash settlements, yet this comes with risks. It’s vital that the insurer should understand their audience demographic. Younger people may see the appeal of a large cash settlement but if they find themselves project managing their own repairs without the negotiating and buying power of a large insurer and with prices continuing to increase they may find it’s still not enough. We have heard that some consumers who have made a claim only to find the cash out isn’t enough are going back to the insurers to complain which means that claim you thought had closed is being reopened taking more of your claims handlers’ valuable time. Customer satisfaction will decrease and in this social media savvy world, just one tweet can damage a company’s reputation. If an insurer has an older demographic they may not see the appeal of a cash settlement as they don’t have a regular income, aside from a pension, to add to the repairs if required.
The impact has been so large that builders have become reluctant to provide a firm price because of material cost fluctuations, and difficulty in finding the labour to do the repairs. To mitigate this challenge, we have seen many instances where pricing is only being confirmed for 24-hour periods. In addition, consumers are becoming more savvy about increasing prices and given the length of time it can take some insurers to be ready to go with starting work they’re having to re-tender.
Procurato have also seen, based on data from the Department for Business, that construction material prices have been changing month on month. The costs for different materials as a result have increased by at least 10% and reaches the level of 73% for some of them. This is driving claims inflation which we believe will be at the level of 10% by the end of the year. This situation is becoming more volatile and there is no immediate sign of anything changing in terms of material availability or price. These are all challenges insurers will need to address, even when working with a schedule of rates.
So, what are the factors that are causing the price increases around plant and machinery?
Basket inflation has reached 8.21% YTD based on price actually paid for materials/labour/plan with experts including the Department for Business estimating that this will reach 10% before the end of the year.
Although availability isn’t always an issue, as an exceptionally energy intensive product during production cement prices have continued to rise month on month since September 2021 (this includes precast such as bricks, tiles and flagstone and ready-mix alternatives).
Paint has seen an increase of around 10% year on year, predominantly driven by Brent Crude Oil prices as a main import from Russia to the UK, up to and including the beginning of Q3 ’22.
Metal products such as doors, boilers, ironmongery and taps and valves have all seen increases at the start of Q3 ’22.
Plastic products such as rigid and flexi plumbing piping and doors/windows have all seen increases at the start of Q3 ’22.
Imports of sawn wood increased by 73% during 2021, steel sections by 60%, the current inflation rate for rebuilding materials is 20.3% which is a record 40 year high [4].
Whilst the UK’s reliance on imports from Ukraine and Russia are low there are some critical products such as steel reinforcement and asphalt products that come from these countries. However, the UK is reliant on imports from the EU who are in turn reliant on imports from Russia.
Inflation isn’t just a UK problem. All EU economies are facing the same challenge so naturally we’re seeing increased prices on building products we import from them.
However, it isn’t all doom and gloom as some heavily utilised materials such as timber, specifically plywood and sawn/planed wood, have seen availability continue to improve which we anticipate will be an ongoing trend whilst at the same time, the Department for Business have shown that prices on critical items including aggregates such as gravel/sand/clay and steel reinforcing bars, as well as fabricated structural steel, began receding at the beginning of Q3 2022.
An additional factor to consider with Plant solutions is the drive for greener alternatives and the need to be ever more aware of carbon footprint. This means as new, more environmentally friendly options come out, prices will also see a large impact due to the more expensive manufacturing processes. Green building materials can be as much as 20% more expensive than their less environmentally-friendly counterparts.
Interestingly the insurers we have been speaking to are telling us they are seeing price increases, but those increases aren’t consistent amongst them.
Subsidence – wishing for the perfect storm
Can you remember back to the hot summer of 1976? There was no rainfall for 45 days, the reservoirs dried up and there was a severe drought resulting in hosepipe bans across the country along with a wonderful and often strange variety of suggestions of how to save water.
Whilst subsidence has occurred for hundreds of years, it was only in the 1970s with the boom of domestic home ownership that insurers started to consider it a peril and started adding it into their insurance offering, assuming it was a relatively low volume value add to the policy. That was of course until 1976 arrived.
Since that year, the first recorded subsidence event in history there have been a further eight subsidence events in 1985, 1990, 1992, 1995, 1996, 2003, 2006 and then a long gap until 2018.
These subsidence surge events have caused exponential increases in costs to household insurers, but the question right now is whether 2022 will be another significant event? Whilst traditionally the perfect storm has meant a culmination of multiple challenges coming together, what’s needed right now is some rain. But that rain needs to be gentle before it builds to any storms to allow the ground to moisten. At the moment it’s too hard and any severe rainfall will just roll off which could potentially lead to floods.
Subsidence is caused in several ways but soil shrinkage accounts for around 75% of all claims. Other causes include tree roots absorbing water in times of drought (which then causes soil shrinkage) and leaking drains and pipes which softens the ground around a property, reducing its load bearing capacity and leading to movement in a property’s foundations.
Are we seeing a subsidence surge?
The mercury hit record temperatures this year in the UK - over 40 degrees Celsius. The rain has stopped and there are now hosepipe bans across most of the country. The UK government issued multiple health warnings for the extreme heat, but as people were taking care of themselves, their families and pets, what was happening to the foundations of their homes?
As many as one in five homes in England and Wales could be at risk of subsidence damage – much of this is blamed from the Victorian times where foundations were not dug low enough to account for the tree roots that would grow beneath them – a common cause for subsidence.
The debate over whether 2022 is a red event or a surge event is a moot point. There are highly differing perspectives from all parties with some saying that valid claims are stable at 25% whilst others are saying 50% of cases are claims.
Currently, from a scientific perspective, the measure of Soil Moisture Deficit (SMD) is currently tracking ahead of what it was in 2018 and has similar patterns to the 2003 surge. The SMD was on a steady rise from mid-April to June, but from early June there was a steep rise, with the SMD values moving above 200, and quickly hitting 285 heading toward the end of July. To add further credence to this, the nature of ground shifts (heat causes retraction, large rainfall causes expansion) leads Procurato to believe the issues will be further compounded as we approach the rainy and then frosty seasons as the ground will yet again shift and resettle as well as tree roots continuing to absorb moisture further afield.
LV=GI have said they are dealing with subsidence claims worth over £1m after the extreme temperatures between just three days in July saying that the ‘already dry soil and the prospect of further hosepipe bans could also result in a spike of subsidence, causing the ground beneath a building to sink and pull the foundations down with it1.’ They continued to say there had been a 205% increase in subsidence cases between June and July and the extreme heat in August could result in a similar spike in claims to the last event in 2018. Another insurer we have spoken to has told us that they have seen a 300% uplift in claims, and this is continuing to rise. However, according to Criterion Adjusters they say that whilst they have seen an uptick in subsidence claims in 2022 it has not yet turned into a surge but nevertheless given that scientifically the driest day of the year was September 25 insurers can expect to see more claims coming in over the next few weeks.
Rob Withers, executive director of the Association of Specialist Underpinning Contractors (ASUC) said “subsidence has become something of a forgotten peril on the insurance radar until this year where it will back to the top of the agenda.” According to ASUC, individual surge years are characterised when there are more than 50,000 subsidence claims. Over the last ten years the number of subsidence claims have reduced with just over 16,000 claims per year. Only 5% of these claims require underpinning with the rest usually involving some structural repair or tree removal.
But what will happen this year? Did the repairs of subsidence years past hold up or are they failing? Did insurers address the root problem, or did they just address the (tree) roots or other issues such as drain repairs and filling and painting (rather than brick reinforcement). ASUC have said that anecdotally they have been told that claims are up by 400%. Therefore, the insurance sector needs to dust off their plans and prepare for a new surge event which will require more underpinning.
But how simple is it to do that? A well-documented challenge across all industries is whether there will be enough skilled labour to deal with a new subsidence surge event. There are reports that we are already seeing delays of 12 – 14 weeks for building repair. Whilst the most recent event was only four years ago, prior to that it was twelve years ago – are the skills still there? Reports suggest that up to 50% of experienced employees have been lost in the last ten years so this will be a challenge.
The rise of new technology could be an advantage though. Using video and drone footage means that less experienced loss adjustors could film the problems to share back with more qualified employees who may know what to look for.
Current Subsidence Forum chair Mark Scobie has said there has a reduction in the number of properties being underpinned, ”15 years or so ago, many insurance companies and loss adjusters would mitigate against the cause by partially underpinning the property in the area of damage. However, they quickly realised that whilst this stabilised the area of damage, it potentially had a knock-on effect to the rest of the property that remained on its original foundation with no further underpinning due to differential movements.
Some left-field considerations:
How important is the ESG agenda?
One of the largest impacts to come out of recent large-scale weather events – both storm and sun - is that businesses and consumers across the world are treating climate change as a true global emergency. According to the World Property and Casualty Report published by Capgemini and Efma insured losses caused by natural catastrophes have increased 3.6 times in the past 30 years. According to Swiss Re Institute's annual report natural disasters have caused an estimated $35 billion of insured losses in the first half of 2022, so it's no surprise that climate change is one of the main concerns of 73% of policyholders and 40% of insurers.
With so many businesses now focused on sustainability the changes coming to the market over the next few years will be substantial. Recent surveys were conducted to establish the depth of sustainability in insurance and out of all the insurance firms surveyed around 25% had looked at sustainability at a supply chain level. That’s one in four. Without doubt those who haven’t need to. Your customers and investors will be expecting it.
In the world of insurance, the claims supply chain is one of the biggest contributors to carbon emissions. From the initial loss adjustment visit to the multitude of suppliers who walk through the door to get the job completed and the parts on top carbon footprint of a property claim can be huge.
But with rising costs, is moving to greener products really an option? Green building materials can be as much as 20% more expensive than their less-environmentally friendly counterparts and consumers may not realise that. Not only that, but given all the shortages, is the realisation more ‘I’ll just take what materials I can get.’
However, a key watch out is that FCA obligations came into effect this year and full compliance for all firms is expected by end of 2023.
How important is it to maintain the green agenda at a logistically difficult time?
Taking the parts challenge aside there are some ways that the claims experience can become more green and potentially cheaper. Making the claims experience digital is one such option. Could insurers be more efficient so that the only footprint is in the repairs and what if the insurer can manage the logistics so that it’s just one driver, one van and multi-discipline labour to get the job completed with the minimal of visits?
But we can’t dismiss parts. There are numerous ways to provide sustainable alternatives and reduce the carbon footprint of home claims:
Concrete alternatives
Recycling plastic windows
Recycling carpets
Flood prevention
Wool insulation
Let’s take wool insulation as an example. Sheep’s wool is one of the best performing sustainable insulating materials on the market. It’s abundant in supply, domestically produced and can last for years. It can protect against moisture, control temperature and is easy to instal and a fact that many don’t know is that is naturally fire resistant. But there are some challenges in that its thermal efficiency isn’t as good as its non-green alternatives, it requires chemical treatments and is more expensive than mineral or rock wool insulation, by as much as £12/m2 more.
Whilst the opportunities to become more environmentally friendly speak for themselves in terms of meeting the needs of the government, the regulators, investors and consumers, the real challenge for the C-suite is to balance them against commercial profit. Investment will be essential as will finding expert suppliers who know how to track CO2, for example total loss and salvage partners who can track and report on CO2 savings per kilogram per green parts used. We strongly recommend reviewing your supply chain data of key materials versus the cost of the alternatives, versus the impact on your environmental agenda. Assuming you can get the parts we believe the payback is worth the money and the effort, even in these challenging times. Whilst achieving net-zero will be a challenge if your business does not move fast enough you may become a so called ‘stranded asset’ in terms of insurance provision or investment.
According to KPMG, what is clear right now is that corporate risk managers and re-insurers will need to work together to understand the risks and opportunities to making the transition to green and that in order to survive in the market will need to understand new technologies, new products, new investment and new ways of working.
Sum Insured Considerations
With rising parts and labour costs are insurers thinking about their underwriting costs as well as their claims costs. We believe there is an emerging financial risk for insurers in that the sum insured on current policies won’t be enough for the building repairs. Brokers are under extreme pressure to suppress minimum price increases and the insurers we have talked to are expressing concern that sums insured are not going up, despite the increased material, energy and labour costs. There are multiple risks here including the key one that customers are under-insured.
What are Procurato seeing the best performing doing?
Inflation
Reviewing all their control measures, frameworks and planned indemnity actions – even when contracts are ‘fresh.’
Reviewing their supplier contracts and pricing and in some cases making active interventions with suppliers to ensure they are buying best.
Increasing rates for suppliers in line with market movements.
Ensuring their contracts are robust, their relationships strong and their dialogue with suppliers frequent.
More than ever the best are making sure that claims, actuarial, pricing and underwriting are joined up and sharing data – if you’re already in the storm the best course of action is to weather it and plan for the aftermath.
Subsidence
Focusing on customer service and speed of execution.
Ongoing dialogue with loss adjusters, actively managing every case and doing the basics well.
Not taking their eyes off their attritional loss ratios “this is an event, they happen and you can’t really stop the weather.”
The Procurato Way
We have seen this before.
Procurato consultants have over 30 years’ experience of managing issues like these and we are currently helping several clients to improve their supply chain. Speak to us to help you establish just how of an issue this is going to be for you and how to fix it.
We understand this market in detail
We have access to unparalleled data and insights from across the whole market meaning we can help you to quickly understand where you benchmark in the sector and provide recommendations to improve.
Our solutions are practical
We can help contractually, operationally, and strategically to guide your thinking through what steps need to be taken and we can help you to execute those plans quickly if you need that support too.
For more information please contact John Gaynor: john.gaynor@procurato.co.uk
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[1] https://t-u-l.co.uk/why-property-insurance-may-increase-in-2022/
[2]https://www.localinstitutes.cii.co.uk/birmingham/home/events/2022/property-insurance-understanding-why-there-will-be-15-plus-rate-increases-in-2022
[3] https://www.woodgate-clark.co.uk/media/building-repair-costs-update-july-2022
[4]https://www.localinstitutes.cii.co.uk/birmingham/home/events/2022/property-insurance-understanding-why-there-will-be-15-plus-rate-increases-in-2022