Claims in the cost-of-living crisis: Seeing both sides of the coin

After spending two difficult years navigating an unprecedented public health crisis, the British public was no doubt hoping 2022 was the year that the ‘new normal’ was consigned to history and the ‘old normal’ returned.

Instead, we have hurtled seamlessly into what is being described as the ‘new abnormal’, buffeted around by political upheaval, economic turmoil to intensifying volatility on the global stage. For the person on the street, this big-picture turbulence has boiled down to a cost-of-living crisis driven by painful rates of inflation for energy and food – and the impact is beginning to bite harder as we head into winter.

Confidence among the UK population has understandably taken a battering as a result. This can be seen in the results of several major consumer sentiment surveys, such as the Deloitte Consumer Tracker, which fell to -20% in the third quarter - the fifth consecutive quarterly drop and the lowest level registered in the tracker’s 11-year history. Data from research firm GfK’s long-running Consumer Confidence Index showed a more optimistic two-point rise in October, but the overall score of -47 alongside further easing in demand for major purchases revealed an underlying financial fragility.

In terms of the insurance market, this changing consumer sentiment is having very direct knock-on effects. Shifts in attitudes and behaviours among policyholders are influencing claims trends, and presenting new or additional challenges for Adjusters, Brokers and Insurers – all of whom have not been immune to the impact of inflationary costs themselves.

The Policyholder Perspective

In the case of policyholders, the tightening pinch on household cashflow means there is a continued focus on securing competitive premiums. However, there is also greater emphasis being placed on claims being paid faster.

Findings from the quarterly Public Trust Index from the Chartered Insurance Institute (CII) found that speed of claims is now the third highest priority for consumers, jumping up from seventh position a year earlier. The index also highlighted how policyholders are seeking more control over the claims process – a priority that climbed from ninth to sixth over the same period.

The CII says these findings were last echoed in May 2020 in the months following the outbreak of Covid-19, which provides a clear indication of the strain being caused by current economic conditions. Aware of this context, the Financial Conduct Authority (FCA) has flagged concerns that the pressure on household budgets may lead to some customers cutting back on insurance and leaving themselves more exposed to risk.

As such, it has written to insurance industry CEOs, highlighting the importance of protecting at-risk customers from “unnecessary products or add-ons and unfair penalties”. The FCA further noted their reliance on monthly premiums, their vulnerability to future interest rate rises, and even the potential for financial pressures triggers problems with physical and mental health.

The Insurer Perspective

And just as inflation is causing policyholders to struggle with everyday bills, it is also driving through cost rises throughout the insurance supply chain. As such, the Bank of England has advised firms to robustly consider the risk that sustained claims inflation would have on settlement costs and solvency, saying: “We expect firms to ensure the risk of further claims inflation is appropriately allowed for in the internal model Solvency Capital Requirement (SCR) calculations.”

Unable to absorb such increases indefinitely, insurers are being forced to raise premiums in many areas. According to the Global Insurance Market Index from Marsh, UK insurance pricing in the third quarter of 2022 increased by 7% year-on-year, following on from a rise of 11% in the previous period. Separate data from the Confused.com car insurance price index, powered by WTW, showed a ￡72 (14%) increase in the past 12 months, lifting premiums to a five-year high.

These conditions are contributing to an increase in the volume of claims, which, perhaps not surprisingly, includes an increasing number of fraudulent claims. Zurich, for example, said it had prevented fraud totalling ￡4.2m in relation to property claims from 1 January to 31 May this year – up 25% year-on-year. Aviva, meanwhile, said it had uncovered more than 11,000 instances of claims fraud in 2021 worth more than ￡122m, and the insurer said it expected the trend to escalate as consumers continue to struggle with the cost of living.

Adjusting to difficult times

The combination of higher volumes, more fraud, more expensive claims, and greater urgency on turnaround times undoubtedly places pressure at the door of stakeholders in insurance. It undoubtedly ratchets up the risk that speed is prioritised over other important outcomes associated with a claim.

In this context, the Loss Adjusting community can grasp an important opportunity to step up and underline its value. We are able to bring the experience needed to help root out fraudulent claims. We can also bring the integrity and agility needed to deliver on factors fundamental to long-term success, such as achieving a fair and proper resolution for customers who are facing particularly difficult times.

?Like Covid, the cost-of-living crisis has been driven by factors outside of anyone’s control and its impact has been felt by individuals and businesses alike. There might not be a simple answer to this ‘new abnormal’ but working out the best way forward will certainly require a balanced understanding of all sides of a difficult equation.

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