Impacts of the cost-of-living crisis on UK general insurance companies

The UK government supported residents with packages like a £400 energy bill grant in the autumn of 2022. However, for many, this didn’t go far enough to offset the impact of inflation on real income. The FCA Financial Lives publication found that 28.4 million people were having increased stress because of the cost-of-living crisis. Over 70% of people reported to Statista to be taking steps to save money including putting off large financial purchases and going on fewer trips in cars.

How are insurers impacted by this?

Rising inflation, increased economic pressure and unemployment on the rise have led to a surge in the cost of insurance claims. Insurers are faced with challenges on all fronts, as the cost of staff wages and other overheads have also increased.

Inflation remains a key uncertainty for both pricing and reserving actuaries, as the impact of future inflation on the value of claims that are yet to be reported or settled is uncertain, as is the extent to which past inflation is reflected in claims data. Insurers are challenged with the task of adjusting premiums to reflect the increased costs whilst ensuring premiums remain competitive and affordable. According to EIOPA’s recent report, the short-term impact on profitability is typically negative, particularly for insurers writing very competitive lines of business where the scope to adjust premiums is limited. However, in the medium to long term, higher interest rates can lead to higher returns on fixed-income investments which can offset the effect on profitability.

We have heard from our clients that the cost-of-living crisis can lead to the following issues:

• Reduction in demand for voluntary insurance cover; whilst this reduces revenue for insurers, it can also create issues for policyholders, who are left financially vulnerable to unexpected events. This is a particular risk for those writing personal lines such as household and pet insurance.
• Reduction in the level of cover as policyholders opt for the most basic option to save costs. This can later lead to an increase in complaints as policyholders realise they are underinsured. The FCA Financial Lives publication reports that 13% of policyholders (6.2 million) who held insurance policies in May 2022 cancelled and/or reduced their insurance cover in the six months to January 2023.

• Inability to collect premiums and pressure to write off debts where policyholders were unable to pay.
• Demand for payment holidays, which may be available on long-term cover such as life insurance but is not typically an option on general insurance policies.
• Demand for lower renewal premiums or different policy terms, for example, lower excesses or waiving of cancellation fees. The Consumer Intelligence CEO shared a similar suggestion that there will be demand for pay-as-you-go models.
• Increased risk of fraudulent or excessive claims, particularly for motor and home insurance, to try to ease financial issues. We have heard that the Whiplash Reforms (Civil Liability Act 2018) have helped to reduce the fraud risk compared to previous times of economic uncertainty. The ABI reported that there has been a fall in insurance fraud uncovered in the last year, partly due to a fall in fraudulent personal injury claims as a result of Whiplash Reforms. However, they also report that the average value of fraudulent claims has increased and so this remains a risk for insurers.

How can insurers help customers while remaining profitable?

The ABI say its members are supporting consumers by providing products that help make consumers more financially resilient in times of need. There are numerous additional ways in which insurers can help struggling policyholders while remaining profitable:

• Flexible payment options. For example, extending grace periods, allowing partial payments, offering discounts for early payments.
• Coverage adjustment options. Giving options to policyholders to adjust their coverage temporarily or to explore alternative cost-effective coverages.
• Improved education and guidance. Customer communication is essential and the more information consumers have about the product and coverage, the more it is less likely that they will have an issue with their policy. The ABI say its members are working with charities and partners to provide simpler information and support.
• Claims handling support. Streamlining processes and improving the efficiency and transparency of claim handling to ensure that policyholders receive timely and fair settlements.
• Loyalty programs and fringe benefits. Fringe benefits include financial wellness initiatives, risk assessment tools and risk mitigation services.

New guidance was published by the Financial Conduct Authority in July 2023 around how insurers could support customers experiencing financial difficulties. You can read our article on it here.

What else can insurers do to navigate this economy?

Managing risk is crucial for insurance companies in any economic scenario and actuaries are well-versed in dealing with uncertainty. However, the current cost-of-living crisis brings additional risks and uncertainties that need to be understood. This is especially true given the uncertainty in the reinsurance market, where cover is proving more difficult to obtain and rates are increasing, which may mean insurers are more exposed to losses than in previous years.

From a reserving actuary's point of view, inflation and the cost-of-living crisis have introduced complexities to the reserving process. Actuaries need to consider the possibility of an increase in the claim frequency and severity. Actuaries also need to consider the impact on changing development patterns as inflation falls back in line with the historic rates.

Data analytics could be used to provide insurers with valuable insight into the behaviour of their policyholders, aid in spotting trends and help to predict future risks. This could also help insurers to remain competitive by being quick to react to changes and trends.