Industry warned claims inflation will last another year

Pandemic-fuelled claims inflation is a “major issue” for insurers in Australia, insurance consulting firm Xceedance says, predicting it will probably be another 12 months before the industry sees some relief – and that’s provided the economy is not hit with another disruptive covid variant outbreak.

The observations from Xceedance are backed by recent first-half earnings results from IAG and Suncorp, with the two leading insurers saying their businesses are experiencing underlying inflation.

“Assuming no more virulent strains of Covid-19 emerge and create further disruption, it will likely be 12 months before supply chains return to ‘normal’, easing pricing pressures there,” Xceedance Australia Client Executive Martin Jones told insuranceNEWS.com.au today.

“However, rising fuel prices could impact on supply chains as well, creating more cost pressures.”

Xceedance says the pandemic is partly to blame for driving up claims inflation as months of lockdowns since March 2020 around the world have upended the global supply chain, resulting in material shortages.

Insurers are affected by the supply squeeze as it means they have to pay more to secure imported building materials such as timber, all of which feeds into claims costs.

Property analytics firm CoreLogic’s quarterly gauge of home building costs shows a nationwide increase of 3.8% in the September quarter last year and its Cordell Building Cost Index indicated construction costs increased 7.3% over the 2021 calendar year, the highest annual growth rate since March 2005.

“Dramatic increases in the cost of building products and auto parts have a knock-on effect for insurance claims,” Mr Jones said.

“My discussions with insurers confirm that claims inflation is a major issue for them now and spans across most product lines.”

Xceedance urges the insurance industry to consider developing strategies to counter rising claims inflation, cautioning supply chain disruption is not the only factor adding to cost pressure.

Social inflation in litigation awards in the court system have “set the bar high” and fuelled claimants’ expectations about what they were entitled to, according to the consultant.

“The spike in litigation award amounts is not as serious as in the US, where quantum is often determined by juries, but Australia is following the US trend of higher damages awards,” Mr Jones said.

He warned that funded litigation, where third parties, rather than plaintiffs, controlled settlements, was prevalent in Australia. It has already had a major impact on class actions’ frequency and the size of damages awards.

While quantum was generally lower than in the US due to caps on damages, the increased volume of claims and extended settlement times impacts on claims inflation.

“Additionally, insurers’ current litigation models, including extensive use of external law firms, are not always conducive to early settlements,” Mr Jones said. “All these issues snowball into major claims inflation.”

Mr Jones told insuranceNEWS.com.au the need for insurers to change the model for claims management is not restricted to class action litigation.

“It’s across the board,” Mr Jones said. “The Xceedance approach is to get on the front foot by analysing the claim and deploying specific tactics to achieve an early settlement.”