Managing 'Loss Creep'

The (re)insurance industry is facing a growing problem of rising claims costs as a number of contributory factors continue to drive claims inflation across the board.

This industrywide issue first came to light at Markel when the insurer began experiencing losses that started to affect already established reserves.

“We were starting to see a creep in our losses, even though we already had established reserves and thought we had a good understanding of what the ultimate loss would be,” said Adriana Belli, Markel’s managing director of commercial property, marine and personal lines claims. “But over the last couple months we started perceiving a continuous uptick in the claim valuations. That has now had an impact on our overall reserves.”

To help better understand the reasons for these increasing losses, Belli approached claims specialists at Engle Martin & Associates, a leading national loss adjustment and claims management provider, for assistance.

The analysis carried out by the loss-adjusting firm was able to highlight several drivers behind the rising claims inflation, particularly disruption to the supply chain in the wake of the Covid-19 pandemic.

Engle Martin’s Chief Operating Officer, Roberto Stewart, said the industrywide impact of this disruption cannot be underestimated.

“It is hard to rank which area of the supply chain is having the most impact on claims inflation, because everything from the shutdown of manufacturing plants through transportation challenges to labour shortages are all having an impact,” he said.

Stewart said that wholesalers and distributors have also been hoarding and rationing materials needed for rebuilding assets lost to natural catastrophes, as they knew supplies were limited, just as many households hoarded essential items in response to feared shortages in the wake of the pandemic.

This in turn has limited supply further and added additional upward pressure on the cost of materials.

“Besides the increases of lumber, which has been the predominant headline news, commodity inflation on raw materials like petroleum and steel is a big issue for suppliers too,” Stewart said. “And that has materially impacted the downstream costs of materials.”

The rising costs of these materials have also affected the underwriting and pricing of a large swathe of risks.

Markel Global Executive Underwriting Officer for Property Guenter Kryszon said the value of the probable maximum loss (PML) for a risk has been particularly affected by this rising inflation, which in turn leads to increased exposure to carriers and a need for higher premiums.

“The rising cost of materials is impacting how much we expect it will cost us to repair or replace the individual pieces of equipment or a particular building that make up a risk should a claim occur,” he said. “And that is certainly rippling through to the PML if there is a catastrophe event.

“That then affects how we look at things from a risk assessment standpoint, as well as how much we are charging for that individual piece of risk.”

But Kryszon said that the effects of these changes may take time to filter through to the various different stages of the (re)insurance value chain.

“As that risk moves through the overall chain, there's going to be some delay in what we'll see appearing in the reinsurance and retro business as inflation increases the magnitude of current exposures being underwritten along with increased claim costs,” he said. “As it flows through the chain it can inflate PMLs, and that dollar of risk now is significantly increased to the point where we've got to charge more for that piece of risk, or take additional underwriting action.”

But this does not mean that there aren’t measures insurers can implement to mitigate these risks. Proper supply chain management can actually help to drive down overall costs.

“The smaller contractors are more challenged by the current landscape than your top-tier national contractors, and that is purely down to diversification,” Stewart said. “If you are a regional player and source your lumber from a specific wholesaler and that wholesaler has limited supply, then those supplies start to be rationed.

“If you are a national player, however, you have the ability to reach out to multiple wholesalers. That is why having contractors with multiple sourcing factors is extremely important.”

And Belli said the impacts from sourcing issues, which insurers have faced since the start of the pandemic, demonstrates the importance of establishing the right partnerships to help effectively control the process.

“The partnership Markel has with Engle Martin allows us to walk our customers through the entire claims process,” she said. “That is critical for our clients, especially seeing as many of them will be experiencing a large loss for the very first time.”

Markel has also built a Large Loss Centre of Excellence dedicated specifically to handling large commercial property losses.

“With this new team we are bringing together our most experienced claims specialists, focused on addressing highly complex, high-exposure claims and combining that with field expertise,” Belli said. “We also understand the importance of data and insights and are making it a priority that this team is continuously combing through the data and bringing those insights back to our underwriters and to the actuaries.

“This ensures that we have a continuous feedback loop across the organisation, allowing us to be proactive rather than reactive when we see other issues similar to those presented by the Covid-19 pandemic.”