The Market Context:
According to EY’s most recent report on the UK home insurers market (Oct 2023), the UK home insurance market experienced the worst performing year on record in 2022 with a loss-making 122% Net Combined Ratio (NCR) driven by high inflation and weather events, losses continued in 2023 at a smaller scale but with further losses expected in 2024 with NCRs of a 104% forecast.
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The Increase in Repair Costs Driving High Inflation:
There are several reasons for this increase, including:
Rising Material Costs
One of the main reasons for the increase in repair costs was the rising cost of construction materials. From the start of 2021 and peaking at the end of H1, 2022 overall materials for repair and maintenance had risen by c.50%
The cost of materials such as timber, steel, and concrete had been steadily increasing due to supply chain disruptions, tariffs, and other factors. This has resulted in higher costs for repairs and replacements, which are reflected in property insurance premiums.
During the second half of H2, 2022 and throughout 2023 overall prices stopped increasing and fell around 10% but still 40% higher than the end of 2021.
Labour Shortages
Another factor contributing to the increase in repair costs is the shortage of skilled labour in the construction industry. As the demand for repairs and renovations increased, there was a shortage of qualified workers to complete the necessary work. The UK had some of the highest number of job vacancies in 2023. This led to higher labour costs, which are passed on to property owners through higher insurance premiums. The aging UK construction workforce has also been a factor with large number of experienced people leaving or expected to leave the construction sector.
The outlook for property inflation:
There are green shoots for those who proactively manage materials and claims costs, but continued efforts and focus on the underlying metrics will be essential to understand how the inflationary drivers are unwinding.
The current outlook is that the main material costs will continue to decrease as availability is becoming much better. Like what we saw in 2023 there will be some anomalies to the trends such cost of flexible pies and fittings currently remaining high. From Procurato’s own research with leading building companies and our knowledge working with raw material suppliers we expect the outlook for insurance companies to be more positive with a continued downward trend in the pricing of raw materials in 2024.
The current outlook is that the labour shortages are also easing. Job vacancy rates have been falling and new build construction rates have also been falling. In the three months to November 2023; this came solely from a decrease in new work (3.6% fall), as repair and maintenance increased by 3.8% which suggests the vacancies in the insurance repair sector are being taken up from new build construction sector. This should be seen as green shoots for insurance companies.
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