Without adequate allowance for the impact of claims inflation, insurers will potentially be exposed to inaccurate reserves and additional challenges when adjusting claims, writes Ingrid Hobbs from Kennedys
Not a day goes by without another news story detailing how rising inflation is affecting our day-to-day lives. Similarly, for those working in claims and insurance, the issue is requiring urgent consideration to ensure business resilience and adequate claims management.
Claims inflation is not a new phenomenon. Insurers, brokers and lawyers take ordinary economic inflation into account every time they consider the future value of a claim and set an appropriate reserve. It is understood as the change in the expected cost of claims from one year to the next.
‘Ordinary’ economic inflation is calculated by use of standard economic indices, such as the Retail Price Index (RPI), the Consumer Price Index (CPI) and the Annual Survey of Hours and Earnings (ASHE), all of which are provided by the UK government’s Office of National Statistics.
Excess claims inflation, however, is the increase in the cost of a claim beyond that of ordinary economic inflation.
It is driven by many different inflationary factors, including increased costs and risks associated with the use of new materials, medicines and technologies.
Examples of such inflationary factors include:
- Advances in medical science and technology.
- New categories of claims responding to shifts in working environments and the use of evolving technologies.
- Professional services spend, including increased costs of instructing experts and lawyers.