Inflation to drive ‘difficult conversations’ at renewals, warn brokers

Insurance buyers face the prospect of higher premiums and “difficult conversations” at renewals as insurers turn their attention to inflation, brokers warn.

Rising inflation and supply chain disruption are increasing exposures for corporates, with higher rebuild costs and longer periods of business interruption. Failure to accurately declare exposures, however, brings the risk of underinsurance, and could see insurers use the Insurance Act or underinsurance clauses to reduce claims payouts.

So buyers will need to provide up-to-date and accurate valuations at renewals, advised Clarissa Franks, placement lead for risk management, corporate and commercial business in the UK and Ireland at Marsh. “In a period of high inflation, there needs to be a robust methodology in how valuations are approached. Which is why having a good rhythm and a logic to valuations is important, particularly for large companies that may have thousands of properties worldwide,” she told Commercial Risk Europe.

The onus is on the insured, not the insurer, to provide accurate valuations, explained the broker. “It is up to the insured to make a fair presentation of risk. The danger is, in the absence of having a decent story about valuation methodology, insurers could proportionately reduce a claim. For a significant loss, that is a very uncomfortable place to be,” she said.

“The difficult conversations are coming where there isn’t a level of comfort on valuations. Either if they do not look as if they have been adjusted, or where they have been adjusted, it is not enough, and the methodology is not compelling. Then we have a situation where insurers either reintroduce average clauses, which may have been negotiated away during the soft market, or insurers may make a more arbitrary link between values and rate,” said Franks.

Higher inflation is impacting the cost of claims in a number of ways, according to Joshua Webb, head of property, UK retail at Aon Commercial Risk Solutions. “Import duties and availability of some products have changed, creating a knock-on effect on prices for many materials and equipment. This is impacting material costs and we are seeing increases in labour rates and contractor margins, all of which affect rebuild costs in the event of a claim. Business interruption exposures are evolving as a result of these issues too, as gross profit or gross revenue is affected,” he said.

Risk managers need to be aware of these issues, said Webb. “Higher inflation potentially exposes clients to underinsurance, which can impact negatively in the event of a claim. Premiums increase in line with increased exposure or declared values, however the ramifications of underinsurance post-loss often outweigh the additional cost of upfront premium,” he said.

According to Aon, more than 90% of property reinstatement valuations in 2020 were underinsured by more than 10%. The average amount of underinsurance was 41%.

“Underinsurance is an unseen problem for buyers and often the full effects are only known when a claim is submitted. Claims may not be fully covered by insurers, which can result in potentially damaging cash shortfalls for buyers,” said Webb.

Underinsurance, or the failure to disclose accurate valuations, can have significant repercussions for buyers when it comes to claims, warned Franks. Inaccurate declared values could result in inadequate policy limits, while failure to properly assess supply chain delays could lead to insufficient indemnity periods for business interruption, she said.

“Indemnity periods for business interruption should be at least 12 months, and as long as 36 months or beyond. If you can’t get contractors onsite, or if planning approvals are slow or parts are delayed, this can chip away at the indemnity period and companies may have limited control on rebuild timelines. They are at the mercy of global supply chains,” said Franks.

With high inflation, insurers are likely to take a less flexible approach to settling claims than they did in the past, warned Franks. “Everyone should check what their policy says and how it would operate, and declare accurate valuations,” she said.

Many policies pay the cost of reinstatement based on the value at “day one”, said Franks. This means insurers carry some of the risk of inflation but this is typically capped at about 15%, she explained. However, such a provision might not be enough, said the broker.

“If the day-one valuation is anything less than spot on, and then you have a loss at the end of the period of insurance in an inflationary environment well into double digits, your 15% provision might not be enough,” said Franks.

Increased values and inflation could have implications for premiums, although this might be mitigated by increased competition in the market, according to Franks.

“I would expect the premium in terms of hard numbers will increase as exposures increase. However, the market for property and marine risk is softening. There are average rate increases, but they are reducing quarter on quarter. So, it would not be a surprise if at some point in the next 12 months, there was a significant offset. While values are increasing, premiums may not increase proportionately,” she said.

There are strategies that buyers can employ to offset a rise in insurance costs from higher valuations, such as adjusting deductibles or policy limits, and self-insurance, said Franks. “We are talking to clients now more and more about insurance strategies. There are options for managing the costs of premiums,” she said.