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Recent data from Claims Metrics, the benchmarking service from Willis Towers Watson suggests that claims inflation has increased by 6.1% for UK motor insurers during the first half of 2021. Since then, inflation has continued to rise and the factors driving it show no signs of abating.
The pandemic, Brexit, and the implications of the green agenda have added considerable additional costs to motor claims, with many insurers admitting that they haven’t budgeted for these levels of claims inflation. The Association of British Insurers has warned that ‘cost pressures’ are likely to cause premiums to rise causing additional financial problems for consumers who are facing higher costs of living in the wake of soaring energy prices and proposed NI increases, not to mention the coming impact of Pricing Fairness. Customers are already taking to social media to vent their frustration about repair lead times – insurers are already taking a reputational hit as Market forces take the driving seat in motor claims costs.
“We are in the eyes of a perfect storm and the future is not looking any brighter. Insurers I’m talking to have Motor Claims capacity and cost at the top of their agenda right now. There is a shortage of labour, parts, and courtesy cars, which is slowing down cycle time and putting pressure on indemnity spending. From a procurement perspective, it’s unbelievably tough out there” says Matthew Parker, Managing Director at Procurato.
The root causes
The impact of the combinations of the factors in the table above are likely to drive inflation in indemnity and operational expenses, put pressure on customer service and strain the resilience of insurers to serve their customers. Let’s explain why.
As with many other industries repairers are experiencing labour shortages and the ‘Great Resignation’ is in play. The lack of experienced and qualified technicians means that repairers are having to pay more to keep their best people in an already highly competitive industry-leading to wage inflation, above and beyond the increases in National Living Wage and National Insurance.
The cost of labour and thus repairer profitability is putting pressure on labour rates which means insurers may be selected against if they’re not paying enough. There is also the pressure for repairers to be paid promptly. Cashflow has become critical to them again, after two years of real pain during the Pandemic, so insurers need to flex their support and ensure they and their outsourced partners treat repairers fairly.
Parts Shortages and the subsequent increase in second-hand values:
The global supply chain disruption is well documented, and it’s impacted the auto industry hard. Global auto-manufacturers such as Ford and PSA are taking control of their own supply chain forcing prices up for repair shops. Many manufacturers are also either changing the specifications of their new cars, saving their chips for their high-value cars, or manufacturing them without the chips in the hope they will arrive soon. The shortage of new cars and, potentially, hesitancy to buy until more / better electric vehicles are available has driven up the value of second-hand vehicles. One of the impacts of this will be the increase in the value of total loss settlements, right at a moment when insurers may find more cars are uneconomic to repair because of parts and capacity availability issues.
Courtesy Car Availability:
There is a general shortage of cars because of the pandemic, which means that repairers and CHOs are struggling to lease vehicles in the volumes they require. Also, longer repair times mean that customers are in courtesy cars for longer, which reduces the available vehicles, particularly where insurers have contracted repairers to provide a car for every customer with an unroadworthy vehicle for as long as the repair takes. Lack of vehicle availability will also have an impact on credit hire.
The challenges we mention above are creating blockages in the repair process which is slowing jobs down. In addition, because some parts are not available, unroadworthy vehicles (URW) are getting stuck in repairers, which means they cannot take in other work. As a result, some are rejecting URW cases, as on average they rely upon a fast schedule of broken cars in and fixed cars out. With workshops getting clogged, up productivity and profitability reduces and some repairers may have no choice but to be selective about priorities.
John Gaynor, Procurato Commercial Director adds “As far back as I can recall, Motor Claims Supply Chain managers have been bracing themselves for a sudden contraction in quality repair capacity which has never materialised. That event may just have arrived, and first-mover advantage, great supplier management, and a really strong resilience plan will be incredibly important.”
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The Big Four Impacts…
Indemnity – multiple inflationary pressures on indemnity spend which will drive up claim costs right at the time when we would expect regulation (Pricing Fairness, Whiplash Reforms) to be affecting the market from the sales and income perspectives.
Expense – Customer frustration (failure demand) and increased supplier management overhead will increase the costs of handling claims. In addition, the potential pressures from elongated claim cycle times will have an impact on expense ratios.
Service – Insurers will need to work harder and have better relationships and stronger contracts to ensure they are not selected against. Availability of parts to progress repairs and inability to provide contracted courtesy cars has often seen complaints and calls into insurers when a weather event happens. Wholesale pressure/shortfalls are likely to increase that significantly. We have already seen social media being deployed to vent frustration, and this will only add pressure to insurers to get answers quickly.
Operational Resilience – The new Operational Resilience regulations come into force in March 2022. This could be the first test of insurers ability to evidence that they have a resilient claims supply chain.
Claims Directors are rightly feeling concerned about their own motor claim supply chain questioning whether they have the expertise to deal with these challenges alone or indeed just how bad these market forces are going to hit them. But the good news is, even if you haven’t reacted yet, it’s still not too late.
It’s vital that insurers review their motor claims processes immediately and identify any gaps that could cause both financial distress and/or poor customer service.
Parker concludes, “the motor insurers across the UK that we have been speaking to are all raising concerns about at least one element in their claims process. Regardless of how big or small that concern may be, we recommend you receive a second opinion. Claims inflation isn’t going to get any better soon and now is the time to assess and verify your plans.”
The Procurato Way
We have seen this before
Procurato consultants have over 30 years' experience of in 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 much 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 us:
Matthew Parker (firstname.lastname@example.org)
John Gaynor (email@example.com)