Buyers face inflation-induced higher premiums across a range of lines, warns Marsh

Insurance buyers are going to have to buy more insurance at coming renewals to cover a range of risks impacted by inflation, with lines from property through to casualty, motor and workers compensation all affected, Marsh warns. The broker’s managing director of global placement, Jack Sallada, said during a media briefing that inflation is currently a “very real risk” for Marsh clients. He explained that those industries that tend to rely heavily on insurance – such as manufacturing, transportation, energy, construction and retail – are most exposed to the inflation crisis through higher production costs, the supply chain slowdown, more expensive raw materials and wage growth. This means it costs more to rebuild any property damage, and companies face higher medical costs for injured third parties and workers, higher loss of earnings claims and higher legal awards for third parties. This is concerning carriers that are trying to work out how to price adequately to ensure they have enough reserves to handle claims, said Sallada. Whether this ends up in higher rates for some risks remains to be seen, but it will certainly mean more insurance is needed to cover higher claims values. The good news for buyers is there is enough capacity within the reinsurance and insurance markets to cover higher risk valuations. Sallada stressed the industry is much better positioned capital wise than when high inflation reared its ugly head back in the 1980s and led to a full-blown liability crisis. But the bad news for risk managers is they will have to pay more for their insurance programmes simply because higher values are now at risk, added the broker. Sallada said property insurance buyers will be most immediately impacted by this issue and warned many risk undervaluing their assets. This will need to be addressed, higher values declared and more premium paid at year-end renewals to secure the limit needed, he said. “As our clients look at their schedules of property and their exposures, what they were valued for in 2020 is not sufficient for 2022. If there was a fire or a total loss, the costs to rebuild would be almost double now in terms of what was listed on the insurance policy. I am generalising but trying to make the point that our clients’ values for their property right now are too low for the costs to rebuild. So that is a huge issue for our clients,” said Sallada. “We are out there to make sure they have proper valuations to rebuild property and business income losses that they could suffer. It is good work to make sure you have proper values, but then the commensurate issue is that your premium prices are going to go up for the higher values you have listed on your policies. So that is a huge issue and the biggest challenge for our clients is related to business property and business income,” he added. Sallada explained that insurers can fall back on co-insurance clauses to refuse to pay claims if assets are undervalued. “Usually with a high co-insurance clause, insurers say that clients have to at least be insured for 80% or 90% of what they think the loss is going to be. You can’t at any given time know exactly what the costs will be, so the insurance policy states that you were pretty close. If that’s the case, they can make sure you have paid the proper premiums and will give you the reinstatement,” he explained. “But if you significantly undervalue the cost to replace and your policy carried a co-insurance clause, then the insurance company is not on the hook to fund the whole loss. So, there is a contractual way they can force you to insure the proper limits. That’s the mechanism they would use,” the broker added. And there are other lines causing similar concern for Marsh and its clients as they head into year-end renewals. One is general liability. “Whatever you thought your ultimate liability was two years ago, it has got to be more today because those dollars don’t go as far in an inflationary environment… clients looking to increase their towers to account for these claims is good risk management and we will take into account inflation, but it is not done without increased premiums,” said Sallada. Another risk where inflation is driving the need for higher premiums is workers compensation, as wages rise in the US and elsewhere, he continued. “Clients need to think about this and we need to help them mitigate paying extra premiums, because payrolls are officially going up because of the labour market,” he said. Sallada also advised risk managers to consider the limits they buy for auto cover. “The costs to repair vehicles are very high and the awards are increasing for any third-party damage. So, clients also need to pay attention to that,” he said.

Buyers face inflation-induced higher premiums across a range of lines, warns Marsh

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