Plan ahead to avoid the impact of inflation on motor trade insurance premiums

September 22nd, 2022 Posted by Uncategorised

According to US bank Citi, consumer price inflation is set to peak at 18% in early 2023 — nine times the Bank of England’s target, raising their forecast once again in the light of the latest jump in energy prices.

This couldn’t come at a worse time for motor dealers as high running costs, new vehicle production disruption and staff retention/salary pressures continue to add strain to an already low margin industry.

Post-pandemic supply chain bottlenecks, higher energy and transportation costs, along with shortages of labour were already contributing to higher inflation at the start of 2022. Now the war in Ukraine has further fuelled global inflationary and supply chain pressures, affecting motor trade Business Interruption claims, due to longer waiting periods for parts and materials.

All of the above directly impact insurers’ overall claims costs, none of which were factored into their 2021 pricing.

Tight labour markets are also increasing the severity for large claims. In what has been described as the ‘Great Resignation’, skilled and unskilled workers are in short supply as many have changed career or taken early retirement, just as demand soared after the pandemic. In the UK, job vacancies outpaced unemployment in the first quarter of 2022 for the first time on record. Increased competition for workers and higher wages drives up repair costs, as well as the cost of defending legal claims.

The question being asked by insurers is where are costs going to go next?

To generate forecasts, actuaries look back at past influences on claims inflation to assist with their estimations of ongoing impact. However, with so many recent seismic events, actuaries can no longer rely on historic patterns or data.

Data on the claims impact of new technologies, such as hybrid and electric technology is sparse; however, specialist repairs are often necessary due to the high voltage exposure and the safe and responsible disposal of damaged batteries.

What we do know is that improvements in motor technologies, such as advanced breaking systems, lane discipline technology and light detecting headlamps are expensive and all impact the cost of vehicle repairs. For example, since 2013, Trend Tracker reports vehicle repair costs increased by 48% as a result of new technology, such as Advanced Driver Assistance Systems.

The fall in motor insurance claims during the pandemic has been widely reported, but less well understood is the bottleneck of personal injury claims which are taking insurers longer to process and impacting ‘claims experience’ within the motor trade sector.

It has been a challenge for injured parties to be examined and treated due to COVID-19 restrictions, and this has led to the processing times for claims taking longer than at any point over the previous four years. This delay in personal injury claim settlements meant that settlements in 2021 had a distinct bias to lower cost ‘vehicle damage only’ claims, temporarily preventing a sharper spike in claims inflation.

Furthermore, people are working longer and increasing their earning potential in order to fund retirement; damages awarded to injured parties are still rising faster than inflation. Medical advancements make survival following a serious accident more likely. While this is of course extremely positive, claim values are increasing significantly, covering future loss of earnings, medical and care provisions along with home adaptations.

Furthermore, insurers cannot ignore the huge impact of climate change, which is an additional concern. The UK has seen a considerable increase in the frequency and severity of flooding over the last 20 years. Forecasts indicate that similar weather patterns will continue in the short to medium term. According to the Met Office, record-breaking rainfall could be 10 times more likely by 2100.

On 18 July, Direct Line issued a profit warning, stating that the soaring prices of used cars, parts and longer repair times have pushed up the cost of claims. Following this, shares in the insurer plunged 13%, making Direct Line the biggest faller on the FTSE 250 to its lowest level since 2013, as the company said that overall claim costs are rising at about 10%.

Direct Line’s current predicament is not unique. The motor trade insurance market is no different. Higher used car prices, increased third party claims costs, longer repair times and inflation in the cost of car parts means insurance premium inflation has continued to fall short of the increases in claims inflation.

Steps you can take to control your insurance premium costs

Our businesses operate in a completely different world today, bringing new and challenging risk exposures, including Cyber threats and cultural employment risks, such as diversity & inclusion, all of which threaten our businesses, people, reputation and brand.

Motor dealers are greatly exposed to accidents and incidents, given the number of sites, vehicles and people within their control. Due to market capacity, insurance premiums weren’t fully reflective of these exposures previously, but after 19 years of insurance premium rate decline, motor dealers can no longer rely on ‘soft’ insurance premium rating.

Insurers are now taking a different approach from the normal ‘pound swapping’ insurance premium vs claims costs exercise that we’ve all become used to – this will no longer work!

An immediate change of focus is required. The only way to avoid increased premium costs is to implement a structured risk management programme in full collaboration with your broker and insurer.

With only seven recognised insurers underwriting motor dealer insurance in the open market, all with a history of incredibly narrow profit margins, motor trade underwriters’ primary focus is on the management of risk and whether it meets expectation. Insurers will be seeking firm evidence of a structured risk management plan, with full, board level buy-in and will also want to have direct input to ensure its effectiveness. Basically, underwriters’ want to see better risk management systems and controls so that the insurance you buy is the last line of defence – not the first!

Even insurer Long-Term Agreements (LTA’s) are now under scrutiny as there is pressure from reinsurers to make existing pricing work. Insurance companies are reviewing all long-term contracts with the view to exiting those considered unlikely to remain profitable.

There are further added benefits to improved risk management controls. Understandably, a motor dealer’s main focus will always be on the insurance premium cost, yet one exposure largely overlooked by motor dealers is their ‘retained risk’ costs. These are the costs of incidents that fall within a motor dealers’ policy excess and/or for damages deemed to be uninsured. In my experience, much of this cost goes unrecorded and lost in ‘miscellaneous’ expense but if properly accounted, can add up to a seriously large number.

Insurers consider pro-active risk management essential and motor dealers that embrace this culture now will receive valuable insurer support, avoid future increases in insurance premiums and reduce their retained risk costs.

Your approach to your insurance renewal can also make a difference. Start your renewal process much earlier than normal; insurers are becoming more selective about the risks they choose to write. Agree your renewal strategy with your broker, devise a plan to reflect your risk tolerance appetite and demonstrate your risk management controls.

Hamilton Leigh facilitates Risk Awareness Workshops for motor dealers, designed to help motor dealers identify and eradicate risk and hazards in the workplace, reducing exposure to accidents and incidents. The workshops are recognised by the specialist motor trade insurers and have a proven track record of creating a safer working environment, closer working relationships with underwriters and achieving significant cost saving benefits for motor dealers.

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