Claims inflation and supply chain set to upset calming insurance market

UK risk managers are growing increasingly concerned that claims inflation risks leaving organisations dangerously underinsured. As far as risk managers in the UK are concerned, claims inflation and supply chain challenges are building into a hornet’s nest. Speaking to Commercial Risk Europe as part of our Risk Frontiers Europe survey, sponsored by HDI Global, one risk manager, who preferred to remain nameless, said it is a “dangerous” time and inflation will be a “big challenge” going forward. “We always write some inflation into the insurance contacts, say 5% or 10%, but now we are faced with much higher numbers than that and we could land up with some gaps in our programmes,” he said. The risk managers all agreed that claims inflation is becoming a bigger part of their conversations with insurers. “There is talk about inflation clauses or index-linked deductibles, or even greater limits on policies,” said one risk manager. “It is often worse for smaller companies that have lower limits on their policies. In the past, they would have retained say ten or even 20 claims each year because they were below the insured limits. But now these are coming in as claims because of the higher value of the losses,” said another. Adding: “That could make them less attractive as a risk for the insurers in the future. It is a fine balance for insureds and insurers alike.” Overall, the risk managers surveyed had been relatively comfortable with the state of the insurance market. While rates are still high, a certain calm had emerged with most companies able to find sufficient capacity as prices stabilised. Now, some uncertainty has returned. That volatility was top of mind for Julia Graham, CEO of UK risk association Airmic. Speaking at a recent Commercial Risk conference, she told delegates: “There are competing forces at play, which the industry is struggling to deal with. That is the turbulence that we are seeing in the world and the velocity of that change. “We are seeing an increase in the once-in-a-generation event – we have had four of those in the last four years,” Graham continued. She said the result is a surge in mid-policy changes, while the war in Ukraine is bringing economic uncertainty. Overall, Graham felt risk managers are entering an era of continued uncertainty. Alexander Larsen, chair of the Institute of Risk Management (IRM) Energy Special Interest Group and president of Baldwin Global Risk Services, is concerned about the growing risk of uninsurable assets. He pointed to cyber as an example and stressed that risk management has a big role to pay in tackling this risk. “Cyberattacks are happening all the time now. Maybe we shouldn’t expect the insurance market to take on the risk of that for us. Maybe it is up to us as risk managers and as organisations to address these risks ourselves,” said Larsen. “I saw an article recently in which a company explained how it had saved millions on its insurance bill by adopting stronger risk management policies. Maybe that is the one good thing to come out of the recent hard market. It is about considering risks, optimising the risks, reassessing your risk appetite and then approaching the insurance market,” he added. However, there are some challenges with this approach. Not every company operates in the same way and many companies place insurance buying within the finance team, which doesn’t always have much engagement with the risk department. Larsen urged risk managers and their financial counterparts to have more dialogue, so that risk management can play a bigger part in reducing insurance costs. “In many cases, it makes sense to have risk management and insurance buying within one department, or at the very least to have them working closely together, so that the process can be optimised,” he said. One of the other survey participants agreed that risk managers and insurance buyers need to tweak their approach. “We need a new approach to risk management and a new approach from insurers. It is a new world for insurance. Take cyber, it is difficult to understand the quantum of the risks involved. That makes it hard for insurers to get the premiums right. Companies must become more involved in measuring their risk exposure, their risk appetite and their approach to insurance,” they said. Overall, the risk managers felt that it remains a time to shine internally. Insurance is no longer a once-a-year conversation, they agreed, and companies are definitely waking up to the concept of risk management, placing risk managers in a stronger position within their organisation and elevating the risk management conversation internally. But they also agreed that there remains a need to drive risk management through the company’s culture from top to bottom. “Ultimately, it is about resilience. Insurance will always play a role in that but risk management has to happen internally first,” one of the risk managers said. The group also wanted to see greater innovation from insurers in the face of changing risk, including more product innovation. “Maybe we need more index insurance rather than the traditional cover,” said one survey respondent. But whatever the future shape of cover, the risk experts agreed that insurance remains a key mitigation tool that they will continue to rely on in the face of sudden and unpredicted shocks. “We need collaboration,” said one. “This is not a one-sided conversation. We need to talk to insurers and brokers and they need to talk to us. We know there are certain products and risks that the insurance market is not keen on at the moment but they need to talk to us about workable solutions.” “The key is in sustained collaboration with the insurance market. The one thing insurers could improve on is sharing information. They sit on massive amounts of data and information that could help us better manager our risks, but we struggle to get them to share,” he continued. Adding: “Ultimately, it helps us to derisk and the benefit for insurers is that it also helps them to better understand our risks. This is to our mutual benefit – actually to the benefit of all stakeholders. Looking to the long term, we all want a healthy insurance market so the question really is: how can we be working better together?”

Claims inflation and supply chain set to upset calming insurance market

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