Cost of living crisis and climate change driving higher claims for insurers globally

The cost of living crisis and climate change are two of the key factors driving excess claims inflation.

Our October 2023 report “Claims inflation in non-injury insurance losses: a global reviewconsiders those factors perceived to be continuing to drive excess claims inflation including: higher than economic inflation price rises across a range of goods and services; the impact of the pandemic and the Russia/Ukraine war on supply chains; and frustration at governments and corporations whose rhetoric may not match real world experience.   

The report takes a deeper look at nine countries from across our global network of offices to illustrate how claims inflation is a truly global issue. Although there are some unique regional influences driving it in different locations, it continues to present a challenge to (re)insurers in a range of jurisdictions. By sharing our findings, we hope to spark a discussion across the insurance market encouraging greater collaboration with regard to risk mitigation and reduction of losses. Some comments from the report are as follows:

“Across many countries, economic challenges giving rise to the cost-of-living crisis are resulting in higher prices, insolvencies, and fraud”.

“General public dissatisfaction in governments and corporations is fuelling a global increase in claims appetite, which is most acutely felt in the US, where public sentiment is being reflected in ‘nuclear’ jury verdicts and in a rise in public nuisance claims.”

“… the trend towards high-value group actions is no longer limited to North America, and (re)insurers across all regions are now feeling the impact.”

Much of this is what is called social inflation – increased volume and costs of claims that are largely attributed to social trends or movements. These include the activities and actions associated with the cost-of-living crisis, #MeToo, climate change activism like ‘Just Stop Oil’, and gender inequality such as the overturning of Roe v Wade in the US.

Commenting on the impact of the Covid pandemic, the report states “Its effects are felt globally from the way in which business interruption claims have been assessed by the courts to the potentially detrimental effect of (re)insureds using alternative, sometimes cheaper, materials and suppliers due to supply chain difficulties.”

This uncertainty caused by excess claims inflation is making it increasingly difficult for (re)insurers to accurately price their products.

The report also highlights the rise in global group actions, which bring with them an increase in costs and in potential awards. This may impact (re)insurers’ ability to set accurate reserves in the future.

Our report explains how extreme weather events in jurisdictions such as Australia, Chile and Hong Kong have increased the number of claims, and also their severity, as a result of a consequent a shortage of supplies of materials (such as timber and steel), combined with disrupted transportation routes and labour shortages.

“The resulting increase – and fluctuation - in prices makes it challenging for (re)insurers to accurately predict restoration and project costs.”

The report warns that failing to take account of potential excess claims inflation can lead to under-reserving, while policyholders may find that they do not have adequate cover in place to respond to claims whose quantum is significantly higher than anticipated.

Ingrid Hobbs, partner at Kennedys, says: “While many of the risks we identify in our October 2023 report are affecting countries around the world, it is anticipated that they will continue to play out differently depending on local circumstances.

“But on both a national and international level, collaboration is key in responding to these risks. By working with their (re)insureds and various stakeholders to encourage loss prevention and risk mitigation, and by working more closely with other (re)insurers to facilitate a more a collaborative response, we hope the industry will be better placed to respond to the rising tide of factors influencing excess claims inflation.”