School’s out and the holiday season is in full swing, but the summer months also bring fresh challenges for personal lines insurers.
This article (and next month’s) consider some of the key issues and trends waiting for actuaries when they return to their desks and clear their inboxes!
This month we consider Household and Travel products, before focussing on Motor next month.
Household
2022 could be a challenging year for subsidence claims. Hot and dry summers (especially record-breaking ones) often lead to a surge of subsidence claims in the autumn, as the effects of clay soil shrinkage become more noticeable. The current 2022 soil moisture deficit, a common indicator of subsidence potential, is tracking in line with previous subsidence-heavy years – notably 2003, 2006 and 2018. Subsidence claims are among the longest-tailed liabilities for household business, and can add significantly to household reserve uncertainty.
The dry summer has also caused an atypically high number of wildfires, with almost 500 so far this year according to the National Fire Chiefs’ Council. More alarmingly, these have been occurring far closer to towns and cities than in the past, increasing the risk of aggregations of large losses, such as the destruction of 41 London homes in a single wildfire in July.
Beyond making adequate allowance for this summer’s wildfire losses, in the longer term, insurers will need to consider how to factor in increasing wildfire risk into both pricing and exposure management. This is especially pertinent as the Met Office has said that global warming means extreme summer heatwaves could be ten times more likely than in the past.
Looking ahead to the winter, the outlook for Home insurance remains a challenging market with upward pressure likely on both claim frequency and average costs across a wide range of perils.
Average costs are being driven up by both raw materials and labour costs. The increase in ABI/BCIS’s household rebuilding cost index hit 17.3% pa in June 2022, well above the 9.4% pa June CPI inflation rate. This was driven in particular by high increases in the cost of breeze blocks, insulation and roof tiles.
Claim frequencies are also linked to economic conditions and so are also likely to increase as the UK grapples with the cost of living crisis, for example through:
- Increased incidents of theft
- Increased propensity to claim, with policyholders more likely to make low value claims than before the cost of living crisis.
- Increased fraudulent claims (especially accidental damage / loss), and exaggeration of bona-fide claims.
Because the increases in frequency are likely to disproportionately affect lower value claims, there is a risk that frequency effects mask the true extent of average cost inflation in the short term. Insurers should take care not to be wrong-footed by this when setting reserves and adjusting rates.
Travel
The first big summer getaway since the Covid pandemic has caused three challenges for travel insurers, which actuaries will need to consider in upcoming work.
Mountains of lost baggage have made headlines and the associated costs will be affecting insurers too. In a typical year, these claims make up a relatively small proportion of travel claims costs, but claim numbers and costs are likely to be much higher this year.
Covid continues to cause uncertainty in the travel market. Most insurers now exclude cancellation as a result of government restrictions, but do provide cover for cancellation or medical expenses if the policyholder or travelling companions contract Covid. With a new wave of Covid infections driven by the Omicron BA.5 variant in the UK, insurers may face increased numbers of cancellation claims as holidaymakers are stuck at home with a positive test.
For many holidaymakers, the summer getaway has also been marred by delays and disruption on the rail network, at airports and at the Channel Tunnel / Port of Dover. As for Covid cover, the degree of cover for travel disruption varies from insurer to insurer and is often sold as an add-on. However, with the public expecting to be compensated for enduring significant delays at the border, insurers will need to be sensitive to the PR risk of declining claims where holiday plans have been left in disarray by travel difficulties.
The broader outlook for travel insurance remains uncertain. There is no industry consensus on how long staffing challenges in airports or at the border will last, and recent experience suggests we might expect multiple Covid surges each year. Combined, these factors mean the expected cost per travel policy is both higher and much more uncertain than has historically been the case, meaning further headaches for insurers!
How should insurers respond?
Although both household and travel claims are relatively fast-settling, accurate and timely feedback from reserving is important for keeping pricing decisions accurate and taking advantage of market conditions. Insurers who have good processes in place to quickly identify, quantify and explain trends will be best placed to react with greater confidence and gain a competitive advantage.
Next month, as the summer holiday draws to a close and year-end reserving exercises loom large, we will review the key trends in the Motor market.
First published in the July 2022 edition of the actuarial post