High inflation ‘is raising the risk’ of under-pricing and underinsurance

Insured values will become a major discussion point with insureds this year, as high inflation raises the risk of underinsurance for companies and mis-declared values for insurers, according to Allianz Global Corporate & Specialty’s 2022 Claims Review.

In a high-inflation environment, it is important that businesses regularly monitor the value of assets, as well as the implications for the costs of replacement or business interruption, said Philipp Cremer, AGCS’s global head of claims performance and liaison.

“Inflation is reaching levels not seen for four decades in some countries, driven by supply chain disruption, higher energy costs and changes in the workforce,” said Cremer. “There are many macro-economic variables at play, compounding monetary inflation and leading to higher costs of claims for property and casualty insurance.”

If companies fail to maintain accurate valuations of assets, replacement values and business interruption exposures, the prospect of being underinsured becomes more likely.

Low valuations of insured assets could lead businesses to purchase limits that fall below rising values or reinstatement costs.

Therefore, the accuracy and timeliness of valuations provided by companies when obtaining insurance (the declared value) are crucial. In a high-inflation environment, and with the growing complexity of large losses, insurers also risk under-pricing exposures, where they rely on declared values that do not truly reflect the reinstatement costs.

“Insurers have to make sure that we capture increased values at the point of pricing,” said Cremer.

According to AGCS, there is some discussion in the insurance market as to whether specific clauses addressing the risk of undervaluation should be brought back into wordings if asset values are not updated.

Property and construction most exposed

The war in Ukraine has fuelled global inflationary and supply chain pressures, causing price shocks for a range of commodities, including energy, food and construction materials.

The consequences of such sharp increases in inflation will be felt across most lines of the insurance industry in the short to medium term, AGCS said.

Property and construction insurance claims are particularly exposed to higher inflation, as rebuilds and repairs are linked to the cost of materials and labour, while shortages of materials and longer delivery times inflate business interruption values.

The cost of construction materials – including cement, timber and steel – has risen dramatically. Steel, for example, is almost 50% more expensive than it was a year ago, according to valuation company John Foord.

Inflationary and supply chain pressures are particularly acute during post-catastrophe “demand surges”, where national or local resources are insufficient to meet the demand for repairs and building materials following major storms and wildfires.

Other lines of insurance, such as directors and officers, professional indemnity and general liability, are also susceptible to inflationary pressures through rising legal defence costs and higher settlements.

Impact of supply chain disruptions on BI claims

Global supply chain disruption, shipping delays and labour shortages are also impacting business interruption claims, with longer waiting periods for parts and materials, AGCS said.

Covid-shutdowns in China, port congestion and shortages of truck drivers have increased delivery and repair times.

Shipping cargo turnaround by major carriers has risen to 60 days from the normal 50 days, which means 20% more containers were “in shipment” than was the case in 2019, while 20% of the world’s 9 000 active container ships are sitting in traffic jams outside congested ports.

In addition, the average time that containers offloaded from ships sit on docks has risen to more than seven days compared to the pre-pandemic two-day average.

The global energy crisis, made worse by the Ukraine conflict, is also driving up costs and disrupting supply chains, with power outages in China and temporary production stoppages for energy-intensive products, such as fertilizer, paper and aluminium.

The cost of shipping a container on the world’s transoceanic trade routes increased seven-fold in the 18 months following March 2020, while the cost of shipping bulk commodities spiked even more, according to the International Monetary Fund.

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