How European insurers can survive claims inflation
A recent report from McKinsey & Company offers advice for how P&C insurers in Europe can keep up with rising costs.
Claims inflation has greatly affected the European insurance market in 2022 thanks to factors like supply chain disruptions and Russia’s Invasion of Ukraine, and it has left claims professionals scrambling to keep up with increasing costs and operate within smaller margins.
In September 2022, Fitch Ratings released analysis of potential economic scenarios that displays how mid-to-high single-digit inflation throughout 2023 would affect the insurance sector. They predict, in this situation, that the P&C insurance markets most impacted would be in Italy, the U.K. and France.
France, in particular, saw catastrophic losses at record levels in 2022. According to France Assureurs, weather-related claims in the country between January 2022 and July 2022 totaled 3.9 billion euros.
Globally, economic loss from natural and manmade catastrophes has hit $268 billion in 2022 – far above the 10-year average of $81 billion.
A recent report from McKinsey & Company also examined inflationary changes and how claims executives can continue to operate effectively amongst them. The report showed a shift in claim composition in recent years, with more expensive perils like escape of water causing a significant increase in indemnity in the U.K. insurance market.
McKinsey suggests chief claims officers (CCOs) can utilize a three-step approach to combat claims inflation.
Step One: Track detailed data
According to the report, CCOs should break down inflation data into four categories: Underlying inflation, claims composition, risk mix and policy changes. It may also be good practice to conduct a scenario analysis in order to project what the inflation situation will look like in the coming years.
Step Two: Implement tactics for immediate impact
There are immediate actions CCOs can enact to take the edge off of inflation pressures. McKinsey suggests claims executives consider reducing supplier spending; redesigning decision engines to optimize settlement; implementing customer incentives; implementing best practices to prevent fraud; and sharing claims insights within their organization.
Step Three: Counter long-term effects of inflation
Immediate action is important, but CCOs must also implement tactics to counter the long-term effects of inflation. These long-term actions include defining a supply chain strategy, utilizing more green parts to reduce the use of resources, improving the valuation accuracy of salvage, implementing AI and machine learning into the claims process and mapping fraud patterns to better predict these crimes.