This inflation spike is going to hurt

06 July 2022 Gareth Stokes
Soul Abraham, Chief Executive: Retail Insurance at Old Mutual Insure

Soul Abraham, Chief Executive: Retail Insurance at Old Mutual Insure

The surge in global inflation is going to have a big impact on local insurance brokers and insurers, who will soon be informing their best clients and policyholders that their short-term insurance premiums are going up 10% or more… “Rising inflation has a knock-on effect across the industry, from our customers, to brokers, to insurers and reinsurers, and every partner in our respective value chains,” said Soul Abraham, Chief Executive: Retail Insurance at Old Mutual Insure. He used the platform at the latest #InsureTalk event, the 23rd in the series, to inform stakeholders that the insurer’s 12-month rolling claims inflation was screaming along at 13-15% midway through 2022.

40-year highs

This higher-than-forecast claims inflation number is causing all manner of difficulties for short-term insurers. “Our initial business planning for 2022 pointed towards claims inflation being around 7% by Q3 2022; but the upward trend has now taken us to almost 15% already,” said Abraham. To put this in context, a bumper bashing that would have cost the insurer ZAR10000 to repair in June last year, now costs anywhere between ZAR13000 and ZAR15000, and sometimes even more. This writer’s immediate response to the changing inflation picture was to ask: “But South Africa’s consumer price inflation is still around 7%... Why is your experience so different?” 

Abraham said there were many complex factors involved. First off, the South African claims inflation outlook is heavily influenced by the global inflation context, with the United Kingdom, United States and many countries in Europe experiencing the highest rate of consumer price inflation in over four decades. And then, there were a range of demand ‘pull’ factors and cost ‘push’ factors that had to be factored in. On the demand side, the 2020-21 COVID-19 pandemic caused supply chain disruptions in many parts of the motor vehicle value chain. The result has been long waiting periods for critical parts and new cars, with prices of parts and second-hand cars climbing ever higher. “Lockdown caused bottlenecks right across the globe, disrupting the entire value chain,” said Abraham. 

Demand ‘pull’ inflation is also evident locally following the large loss event that occurred during the April 2022 KwaZulu-Natal floods. The damage to homes and motor vehicles consequent the flood has since sent insurers and their third-party suppliers scurrying to find the input materials to indemnify insureds. On the cost ‘push’ side, local car part prices and repair costs have been on the rise due to general inflation factors such as wage hikes and producer price inflation; soaring energy prices; and the imported inflation from struggling offshore markets. 

What it means for your clients

High inflation has created the absurd situation where second-hand cars are appreciating in value, despite having more miles and wear and tear. Abraham illustrated this with a graph of the get\Worth index, which confirmed a rising price trend in second-hand cars from midway through 2020. The challenge this introduces to your clients is two-fold. Firstly, they are at a higher risk of being underinsured based on their motor vehicle having appreciated in value. “If your clients had to sell their vehicles today, they would probably get more for it than they would have pre-pandemic; so, are these vehicles insured at the right value?” Abraham asked. 

Secondly, your clients are likely to face steep short-term personal lines insurance premium hikes, even if they fit into the model ‘lower than 25% loss ratio’ segment of the market. “Insurance will get more expensive driven by the fact that input costs are going up; we are looking at this closely and doing our best to ensure that we limit new business prices for as long as we can,” said Abraham, but he warned that the days of 4-5% premium increases for good clients were a thing of the past, certainly in the coming months. “We are expecting inflation to be between 15-20% this year, before it stabilises at around 5% into Q1 2023; if it does not settle there, we expect serious consequences,” he said. 

Old Mutual Insure is concerned that higher-than-trend claims inflation will erode underwriting margins across the domestic non-life insurance sector. One of the risks that go hand-in-hand with margin erosion is that insurers with smaller or stretched balance sheets could be forced to rein in their activities, or, in the worst case, exit the market entirely. Abraham hinted that some non-life insurer licenses could come under pressure in the next 12 to 24 months. The only sensible way to ward off this eventuality is to ensure that risks are appropriately rated and priced, and that claims costs are aggressively managed down. What does this mean for non-life insurance brokers and risk advisers? 

A not so nice new normal

Well, you can accept that future face-to-face meetings with you clients are going to be tough. You will have paint the scene of global inflation at the highest level in four decades; of auto prices and repair costs rising at breakneck speed; of used vehicle costs breaking the deflationary trend; and of higher-than-CPI increases in domestic producer price and wage inflation. This writer’s best guess is that clients who hear this introduction will be expecting what comes next, or at least the premium increase part of your two-part message. Truth is that you will probably have to tell your clients that their premiums are going up and that the sums insured on their policies are too low. 

“Underinsurance is a big concern,” concluded Abraham. “If inflation is as high as it is, then the sum insured for your clients buildings, contents and motor vehicles are probably below what they should be”. As all non-life insurance stakeholders know, underinsurance causes stress at claims stage. Abraham appealed to brokers to have the tough conversation up-front and ensure that sums insured were appropriate and adjusted to reflect market valuations from time to time. 

Writer’s thoughts:
It seems that South Africa’s early enthusiasm over dodging the global inflation bullet is misplaced, with claims cost inflation biting us ‘where it hurts’. The disappointing message from this ‘impact of inflation on insurance’ presentation was that clients who have a great claims record are still going to feel the pinch of steep premium hikes. Have you witnessed big hikes in your clients’ personal lines premiums this year, and how are you and your clients responding? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].


Added by Gareth Stokes, 06 Jul 2022
Interesting observation @Humphrey, and thanks as always for sharing. There must be countless procurement horror stories that readers can share- from both the private and public sectors. In such scenarios we end up with some kind of inflation-on-inflation multiplier effect (my guess).
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Added by Humphrey, 06 Jul 2022
Interesting indeed. I often question the effectiveness of the mighty purchasing power of these large insurers that should have tremendous bargaining power - these days through a centralised and focused procurement department.

I had a windscreen chip repaired and enquired from the insurer how much it cost (i keep records and monitor my loss ratio) and was told it was R 825 (2 years ago).

2 months later i had another chip (same size) on the same vehicle and decided to merely have it repaired myself at the same repairer - cost R 275. Hmmmmm

I used to work for 2 of the largest insurers and ran a department where we used to procure our own goods. Being responsible for expense management we ensured we bought stationary and staff refreshments etc. from the retailer that offered the best prices. Then a procurement department was set up and we were forced to use them to procure our goods (but we were still held responsible to the same extent for our expenses - hmmm - performance management principles are questionable). Our expenses went through the roof. At a managers conference i stood up and quoted prices where we could get our coffee at half the price we were paying through procurement (yes half the price). The MD went through the roof and this led to an investigation but alas little came of this despite the facts.

I will leave this comment at this stage without further elaboration.
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