Insurers must adapt to recession-fuelled claims hikes

Insurers’ can expect to see their profitability come under further pressure as the effect of the recession hits households and businesses around the UK cautions EMB, the international consultancy specialising in non-life insurance.

EMB Partner, Peter Lee, said; “Insurers need to ensure that their pricing assumptions reflect the unfolding situation. Unfortunately for insurers, research has overwhelmingly shown a correlation between poor economic conditions, unemployment, and crime levels, particularly crimes against property.”

Recent evidence supports this theory. This month, it was reported that supermarket, Tesco, had apprehended more than 43,000 shoplifters in the first half of 2008, an increase of 36% over the same period in 2007. The research also indicated an increasing trend for theft of more everyday items.

In Ireland, where the downturn hit earlier, the Central Statistics Office has reported increases in retail theft and burglary of 9 per cent and 7 per cent respectively during 2008. Arson is also up 24 per cent this year.

EMB’s analysis of domestic theft and unemployment levels in the UK* since 1989 shows a huge acceleration in theft over a two year period to a peak of 900,000 in 1992 at a time when unemployment levels nearly doubled. Since then both statistics have tracked each other very closely.

Lee says that there are a number of things that insurers can be doing to insulate themselves against losses. “The impact will vary geographically so insurers need to ensure their postcode analyses are kept up-to-date as circumstances develop. Clearly, there are some areas of the country where the downturn is hitting more severely and where one would expect greater increases in claims as a result.”

Lee also advises that management information processes must be geared up to enable frequent monitoring of lead indicators such as claims frequencies and business flows by region.

While theft will exert the biggest pressure on household insurance premiums, the Irish experience also shows a distinct increase in the number and value of claims for household risks such as burst water pipes and accidental damage. Overall, household claims are over 40% higher than they were two years ago before the downturn started.

Lee said he expects the effect on motor insurance to be less clear owing to improvements in vehicle security and the fact that the downturn will have the general effect of reducing the number of journeys made.

The need for insurers to tighten up still further on fraudulent claims is also apparent. Andrew Torrance, chief executive of Allianz UK, said at a general insurance conference held this month that they have seen a 60% increase in questionable claims for motor and commercial property over the last year.

*Sources: Association of British Insurers (domestic theft) and Office of National Statistics (unemployment).

The graph below shows the trend of UK unemployment and domestic theft on an annual basis since 1989