A NIBA Brokers' Guide - Issue 7

A NIBA Brokers’ Guide:

ISSUE 7 – DECEMBER 2022

The impact of high inflation on the insurance industry

Contents High inflation and the impact on insurance customers

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Inflation impact: what the current economic climate means for insurance

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Keeping pace with rising inflation

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The impact on claims and the supply chain

The NIBA Brokers’ Guides are brought to you through a partnership between Allianz Australia Insurance Limited (Allianz) and NIBA. We hope the knowledge of our subject matter experts, coupled with Allianz’s industry expertise, helps you and your clients prepare for the future. We welcome ideas for future subjects – please email your suggestions to editor@niba.com.au.

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Welcome note

PHILIP KEWIN Chief Executive Officer, NIBA

PHUONG LY Chief General Manager, Commercial at Allianz

After navigating our way through the global pandemic, we found the spectre of global inflation waiting patiently for us – presenting a whole new set of challenges to tackle.

The very real impact of the inflationary environment we’re living in can be felt every month in our mortgage repayments, every quarter in our energy bills, and every time we visit the supermarket.

This presents an opportunity for brokers, yes, and it’s one that our business community absolutely needs you to act upon.

Belts are being tightened, and as businesses scrutinise every line item of their budget in the hope of identifying some easily achieved savings, insurance is often one they’ll put a question mark against.

There’s never been a more opportune moment to fully embrace the role of risk adviser. Businesses are facing an unprecedented complex web of risk, and they need the right advice, and the right protection, to confidently step into it.

We’ve talked all through COVID-19 about the vital role brokers have to play, and as we head into 2023, that role is evolving, but is more important than ever.

Over the coming months, the challenges are likely to grow, which is why this edition of our Brokers’ Guide is focused on inflation.

While clients will have an understanding of the impact this inflationary environment will have on their day-today, they may not fully understand the impact on the insurance sector.

From the impact it’s having on the insurance industry to the way it’s affecting supply chains, we’ve explored the inflationary environment from a number of angles – ultimately, to arm you with the context and the conversations to be having with clients.

And, it’s important they do – because, while they may identify insurance as having the potential to save some money, the reality is it’s far more likely to increase in cost.

From replacement values to supply chains, the difficulty in getting repair work done to the increasing threat of extreme weather, the challenges keep on mounting up for businesses across the country.

Times are tough, undoubtedly – however, the need for a proactive, caring risk adviser has never been greater.

And both Allianz and NIBA are here to support you every step of the way.

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High inflation and the impact on insurance customers Australia is facing record-high inflation levels, with the September 2022 quarter marking annual inflation of 7.3 per cent the highest rate in 32 years1. It’s no surprise that inflation is impacting insurance customers, brokers and underwriters – but there are opportunities for greater education and support for broker clients.

Strains on supply chains, uncertainty, the war in Ukraine, and knock-on effects of the COVID-19 pandemic are all contributing factors to the current rise in the cost of living and soaring inflation rates.

Brokers need only look at asset values in vehicle insurance where, for the first time in recent history, market value is outstripping agreed value in many cases.

“It’s not something I’ve ever seen before, this sort of rapid change. Certainly, for the entire time I’ve been involved in insurance, vehicle values have depreciated,” says James Fitzpatrick, Chief Technical Officer at Allianz.

“With the extensive flooding we’ve seen in the last 12 months, one of the things that follows is the demand surge in labour and materials cost in areas where we’ve seen these natural disasters can outstrip what we would have expected in terms of building inflation,” says Fitzpatrick.

In uncertain times, says Fitzpatrick, there is an opportunity for brokers to show value and provide a calm influence and good advice to their clients.

Supply and demand adds pressure

Underinsurance – a risk to be wary of As we continue to see assets changing in price and different rates of inflation based on the interruption to the supply chain, as well as labour and energy pressures, there is pressure on replacement values for customers.

“When using averages, both clients and brokers need to be really clear on the current valuation of assets and also allow for what might come through in terms of further inflation over the year,” says Fitzpatrick.

Sheild agrees underinsurance is “high on the insurance agenda” and says certain markets are now not looking at insuring assets unless an updated valuation has been undertaken.

“Every broker needs to be asking their clients about valuations. And not only that, but as a broker, we just cannot accept the valuation number. I believe we’ve got a duty for accurate valuation disclosure, in terms of serving our clients and helping them.”

An increase in high-value severe losses

Cameron Sheild, Strategic Risk Advisor at Lockton’s Melbourne office, has seen first-hand the impact of supply and demand on inflation.

After Australians have experienced multiple natural disaster events from bushfires, hail, flooding and cyclones, the recovery inputs effect supply and demand which in turn impacts inflation.

“Obviously, as brokers we understand capital supply demand and how it impacts our market cycles. The time it has taken to arrange an assessor and various tradespeople required to complete the works in my estimate has tripled,” says Sheild.

“Effectively, what we’re seeing is an increase in severe losses,” says Sheild. “It’s not just a matter of low-value frequency losses that always occurred. We’re now seeing high-value severe losses frequently occurring.”

“Delays have occurred in the process due to the supply and demand availability, and this has had a downstream impact on not only claims inflation that is passed on to the client but also the delay in the indemnity, settlement and repair losses.”

“We’ve seen underwriting authorities being taken away, we’ve seen the process taking a lot longer, and the underwriters themselves are under immense pressure, and the loss ratios are only increasing.”

Consumer Price Index, Australia, September Quarter 2022, Australian Bureau of Statistics, www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/sep-quarter-2022

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Five ways brokers can support their clients in a high-inflation environment

1.

Proactively inform your clients and set their expectations. Ensure any insurance offering is sound and appropriate, particularly examining agreed value versus market value policies in the current climate.

2.

Innovate and consider how clients can manage risk. What other policy terms and conditions might be adjustable to help get the balance between risk and the cost of insurance?

3.

Question your clients on all their values – property values, business interruption and indemnity periods – to ensure your clients understand the risk of undercooked values leading to a short-changed insurance payout.

4.

5.

Define your clients’ appetite for risk, and the ability to withstand inflation replacement values.

A broker needs to be able to understand a client’s business and risk profile to adequately procure suitable insurance. Look at property valuations, review business interruption exposure, and review their balance sheet in terms of the financial KPIs and risk tolerance.

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Inflation impact: what the current economic climate means for insurance

High debt, user spending, strong consumer demand and global economic conditions continue to drive inflation – and it’s impacting almost every facet of our personal and professional lives.

And, with forecasts suggesting this isn’t a short-term situation, it looks as if we’re all going to have to buckle in for the ride.

is struggling to know what levers to pull to bring inflation under control while minimising harm to the family budget.

“It’s just difficult for a lot of people out there,” says Phuong Ly, Chief General Manager Commercial at Allianz.

“Inflation is the fact that we overheated the economy by injecting too much cash into the economy without there being a cache. We fundamentally printed money to get Australia through the COVID-19 crisis.”

“The cost of living is going up, energy prices are going up, and the geopolitical environment, on top of all that, is creating a huge amount of uncertainty for everyone.”

“The challenge for most governments is providing leadership and giving people a direction in which they’re taking the country, as well as communicating what are they going to do and to support to keep inflation manageable.”

Broker Dale Hansen, CEO of Austbrokers Coast to Coast based in Burleigh Heads, Queensland, says the government 6 NIBA GUIDES: Issue 7 – December 2022

Hansen is confident that Australia will ride out this period better than most, although acknowledges significant inflationary pressures are still on the horizon for insurance policyholders, with increases across some supply chains still expected.

“An inflationary increase isn’t necessarily going to account for that, and for a lot of people, I fear when something goes wrong, they are going to be in a very challenging space.”

Impact on the sector ongoing

Opportunity for brokers to reinvent

As the cost of capital, labour and materials continue to increase, the cost to claim and cost of acquiring funds increases, as does third-party costs which all add to rising insurance costs.

Ly says insurance is often a ‘grudge purchase’ for customers, but this offers a huge opportunity for brokers to lead the way on educating and informing clients of the drivers behind the change and uncertainty in the current market.

As reinsurance claims continue to rise, along with increased catastrophes placing greater risk on insurers, the sector is left in need of a multi-faceted approach to bring down insurance costs.

“Take the opportunity to provide insights and thought leadership for your customers. Keep them informed about what is impacting the market and how to best equip themselves to be ready now and for what lies ahead.

Being informed of the issues, will ensure your customers can make the best choices for their needs.”

Hansen is finding the availability of products due to decreased appetite for risk a far greater issue for his clients.

“We’ve seen a decrease in competition as we’ve seen some underwriters offering that product leave the market, and not seeking to have any availability in that asset class.”

The market is suffering from decreased capacity as brokers struggle to find suitable insurance policies for some risks like professional indemnity, cyber, property – which Hansen says is ‘very challenging for brokers’.

Hansen believes this is the right time for brokers to innovate and be of value to clients.

“We need to reinvent ourselves,” he says. “We provide advice as a service. First and foremost, that’s what we are, that’s what we do. We need to see ourselves as professionals, and we need to charge for our advice.

“The general public has never needed an insurance broker more than they need one now. If anything’s proved this, it’s the catastrophes that have run across the eastern seaboard for the last 12 months.”

Five things brokers need to know about inflation

1.

The high level of underinsurance in Australia isn’t going anywhere and the cost of rebuilding or replacement is increasing. Check your clients are sum insured for the correct amount.

2.

Accurate valuations are critical in the current market. The old adage of just increasing your sum insured by inflation or CPI won’t cut it.

3.

Brokers need to focus on the quality of advice to be a salve for clients facing uncertainty in their economic futures. Increasingly, the broker is becoming a critical point of contact for clients.

4.

Understand the impact of inflation on a client’s business from the right sum insured level or if profit levels will be impacted by inflation.

5.

Really get to know your clients. A good asset management plan and a good business continuity plan are key to helping clients present their risk in the best possible light.

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Keeping pace with rising inflation In times of rising inflation, the broker relationship is about making sure your customer’s insurance stacks up.

In times of stress, people need experts to rely on. And, in a high inflationary environment, insurance brokers have a hugely important role to play to help clients navigate through the coming months and years.

It’s going to be a few months of tough conversations with clients to ensure they fully understand what the impact of high inflation means for them – both in terms of premiums, but also should a loss occur.

Underinsurance is an already pressing concern across Australia. Many customers are firmly focused on finding ways to cut back and save money, while the rising costs of repairs and rebuilding are widening the gap between valuations and true replacement costs.

“Most people are well aware that costs are on the increase, but have they actually done the math to assess the real cost to them if the worst case scenario was to happen?” asks Danny Adams, General Manager Insurance Claims for Allianz.

“The recent flood recovery in Victoria is a tragic indication of what can happen when customers elect to take the risk of underinsurance. They just can’t get back to where they were before their loss was based on their level of cover.”

Reviewing policies in an inflationary environment It’s vital to touch on any exclusions in existing cover that should be reconsidered in the context of high inflation and detail the potential implications of declining the options presented. Valuations and terms and conditions that have been in place for some time will need to be reviewed to allow for the flow-on effect of rising costs. In the case of commercial property insured for potential damages, restoration costs have increased significantly.

In addition, it’s essential to be thorough with an assessment of assets. Valuations based on the original purchase price will warrant a reality check.

“The conversation to have with a customer whose business hinges on having the company vehicle, for example, is ‘what needs to happen to future-proof your turnover in these tough times when repairs or replacements can take 8 NIBA GUIDES: Issue 7 – December 2022

months instead of weeks?’ ” Adams says.

Your customer relies on their insurance to come through for them once they lodge a claim, so a thorough review of policy inclusions and maintaining up-to-date valuations is vital in times of rising inflation.

Adams says, “Connecting regularly to keep that conversation going and review your customer’s current situation is so important in these rapidly changing times.

We’re always looking for ways to improve the customer experience and sharing up-to-date knowledge with the insurer prepares us to fulfil expectations.”

Adding value will always come down to more than just the raw, upfront cost.

The dependability of an insurer’s supply chain largely determines their capacity for satisfactorily restoring your client’s home or business to full function, according to Bradley Bartlem, CEO of Hunter Premium Funding.

“In the context of a post-pandemic economy and political turmoil in Eastern Europe, premium funders who’ve developed robust strategies for dealing with market volatility will provide greater customer assurance than bespoke processes and supply chains.”

Bring solutions to your clients’ pain points Cash flow is commonly a big source of stress for business owners in times of high inflation. Where you’ve identified a need to substantially increase a customer’s existing level of cover, providing them with the option of a premium funding product to meet that extra cost can be the real value-add. “Poor cash flow forecasting and financial management is the downfall of more than 80 per cent of businesses that fail,” Bartlem says.

“The flexibility of paying in instalments, instead of a lump sum, can be a welcome solution to the stress of cash flow in uncertain times.”

Not readily available in other industries, this facility can make it accessible for your client to commit to the level of cover they need.

“Soaring interest rates have prompted traditional lenders to crack down on borrowing requirements. This way, you help your customer to afford essential safeguarding of their business by freeing up the cash flow they need, without all the paperwork,” says Bartlem.

“Increasingly, it’s a benefit for many customers to be with a premium funder that has the capacity to be able to work with their clients through situations of hardship and work with the broker to bring them through that rough patch financially.”

In response to the widespread impacts of rising inflation, it’s vitally important for brokers to demonstrate their value to clients.

Making sure they have not only the right levels of cover in place, but access to premium funding should they need it, are two essential ways to help ensure clients emerge from this inflationary period unscathed.

Tips to start the conversation

1.

Don’t wait until it’s time for renewal to prompt your customer to stay on track for the protection they need.

2.

Check in regularly to discuss how their situation or needs may have changed and allow plenty of time for them to consider the options you present them with for better value insurance.

3.

Encourage a review of existing policies and inclusions and talk through potential scenarios of how the process of a claim might look for them, and where updating valuations may be in their best interests.

4.

Challenge the idea that cutting upfront costs will save money. Help clients understand the potential impact of underinsurance.

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The impact on claims and the supply chain

As global inflation triggers supply chain delays and chronic labour shortages, it’s imperative that clients understand what this means for insurance claims.

The crippling, flow-on effects of high inflation are being seen in the soaring cost of goods and services, in tandem with limited availability, leading to increased complexities and lengthy delays for claims resolution.

The impact of the supply chain difficulties affecting businesses across the globe continues to have a significant impact on claims. Port closures, labour shortages and COVID-related delays – not to mention the war in Ukraine – mean that supply is stifled, and the wait for goods to be received – and claims to be resolved – can be lengthy.

Head of Claims at Gallagher, Adam Squire, says that supply chain challenges are particularly noticeable in the case of vehicles, for example. “Spare parts are increasingly difficult to source, so even longer wait times are unfortunately a reality. If the car is a necessity for people’s livelihood, they’re faced with an even bigger problem.”

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Supply chain issues across the board create an economic climate where it’s vital to review the value assets are insured for.

Squire encourages brokers to seize the opportunity to really look after clients by anticipating their needs and guiding them to adopt the added protection they need to counter the effects of high inflation.

“Setting the sum insured can seem like a straightforward paper exercise but becomes a complex consideration once shortages come into play. When it comes to the crunch of lodging a claim, that’s where the rubber hits the road, and you see how well your broker has advised you. Well-informed recommendations will pre-empt make-or-break outcomes for your client and make adjustments accordingly.”

Reviewing cover to account for supply chain challenges There’s nothing worse than having to go out to inform a client they’re drastically underinsured once they’ve suffered a loss, so using current supply chain challenges as a lead into the conversation is a smart way to tackle it.

Luke Smith, Head of Property Short Tall Claims for Allianz, says, “Sharing the bad news about rising replacement costs is a far easier conversation to have while there’s the opportunity for the client to update their cover. You might start by asking whether they’re following the news and the impacts that things like the war in Ukraine are having on the global supply of commodities.

“Be well informed enough yourself to help them grasp the tough cycle this has triggered, whereby it’s taking more time to process claims, and the levels of cover they’ve had in place may no longer be adequate for their needs as the costs of materials and labour continue to climb.”

Ramping up risk advice

In prior years these periods may have been sufficient but may now need to be increased to ensure adequate business interruption protection is in place. We are seeing widespread time delays that are occurring for reinstatement works.”

For brokers, it’s about helping clients balance cost considerations with an appetite for risk.

“It all comes back to early engagement with clients,’’ Coulton says. Brokers need to gain a full understanding of their clients’ businesses and tolerance for risk. Only then, can a broker suggest higher risk retention options to consider, if containing premium expenditure is required.”

Ultimately, as this inflationary environment continues into the foreseeable future, together with other geopolitical factors, the global supply chain will continue to prove challenging.

By ensuring clients’ insured values are accurate, and provision has been made for supply chain delays, brokers can help reduce the potential impact the supply chain may have on the resolution of claims.

This is a market that compels brokers to become risk advisers to their clients.

A short supply of materials and labour means that rebuilding costs have gone through the roof, and it’s necessary for business owners to think about the right level of cover.

Sally Coulton of WTW explains, “Brokers need to be having early conversations with clients about their declared values.

Insurers will pay particular attention to ensure correct replacement values are being declared. Given inflation and supply chain shortages, brokers should also recommend that clients obtain professional valuations.

“It is important for clients to ensure they won’t be prejudiced in the event of a claim by co-insurance clauses in policies if they have underdeclared their values. In the current economic climate, a review of policy sums insured may be required to cater for a rise in values and confirm they would have adequate protection for a significant loss.”

Have customers who’ve been wise enough to take out business interruption cover accurately anticipated what it will take for them to keep their business going for an extended period, at inflated running costs?

Provisions for leasing alternative premises or loss of profit may fall short if their current level of cover was calculated prior to the current supply chain challenges. “Indemnity periods are critical for clients, taking repair and rebuild challenges – which can be difficult and lengthy – into consideration,” says Coulton.

Key takeouts for brokers

1.

Global events are putting even more pressure on supply chains, with costs increasing and some goods being in short supply – therefore, a review of insured values is essential.

2.

The reality today is that the time it takes to fulfil repair work is being lengthened by supply chain delays, so reviewing the length of coverage clients have for, for example, business interruption is vitally important. One year may no longer be adequate.

3.

Make sure you’re well informed about the factors impacting the global supply chain – it will help when having conversations with clients.

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Allianz and NIBA gives no warranty and makes no representation that the information contained in this publication dated December 2022 is, and will remain, suitable for any purpose or free from error. To the extent permitted by law, Allianz and NIBA excludes responsibility and liability in respect of any loss arising in any way (including by way of negligence) from reliance on the general information contained in this publication or otherwise in connection with it. The contents of this guide are protected by copyright. © Allianz Australia Insurance Limited (ABN 15 000 122 850) and National Insurance Brokers Association 2022.