By Andrew Cavan, director, head of major and complex loss (North)
As reported in the Financial Times, on 31 August 2022, the head of one of the world’s largest building materials companies confirmed that he’s seeing a ‘second wave of cost increases’ following the surge in gas prices.
Spiralling energy prices are just the latest addition to the cocktail of global events that have driven high inflation and a recession in the UK – and currently, there’s little indication that this market uncertainty will improve in the immediate future.
So how will this impact insurers’ costs for property reinstatement and business interruption (BI) claims in 2023?
Materials and labour
It’s universally well-known that the global shortage of many basic building materials is driving prices up, and the ongoing war in Ukraine has exacerbated this issue. Europe has a high level of dependency on Russia for gas, and they supply 20% of the world’s softwood. Ukraine is a global producer of metals – nickel, copper and iron – and any shortage significantly impacts the production and supply of steel, which is crucial to several industries, especially construction.
However, there’s evidence that the scale of these price increases is slowing, and we’ve even seen some price decreases in timber commodities. But the most important factor now is rising energy costs, particularly in the production of energy-intensive products, such as bricks and steel.
Higher prices aren’t the only issue to consider. Long replacement times for many materials are also causing major problems, with lead times more than doubled on products such as steel joists, roofing membranes and insulation.
Labour costs are also increasing in the UK due to Brexit, the post-COVID Great Resignation and a general shortage of skilled workers, from plumbers and electricians to lorry drivers. Employers are offering higher salaries to attract and retain staff, which results in increased costs. And so, we go on.
When will it end?
Every indication is that building costs will continue to rise in 2023, with an obvious impact on material damage and BI settlements. The Building Cost Information Service, the leading provider of cost and price data for the UK construction industry, is currently seeing an 8.5% increase in year-on-year returns, and they forecast this figure to be 7.5% in quarter one, 2023.
Sedgwick’s repair solutions quantity surveying team’s current inflation forecast for the insurance building repairs market in 2023 is 6%. This assumes some market stability, and as a result, material costs begin to fall off.
However, in practice, there continues to be a lot of building work available, and contractors can afford to be choosy in what they take on. Recently, we’ve seen a higher incidence of contractors declining to tender and not accepting projects because costs have shifted since they submitted their quotes. The support of a reliable and robust contractor network will be essential as we work through various challenges in the coming months.
Mitigation measures
Adjusters and insurers can’t control market forces, but we can react to them with pragmatic and nimble solutions. Planning is crucial, and we need to be aware of potential delays and bottlenecks in the supply chain and be ready to work around them.
In building reinstatement, orders for critical materials should be placed as quickly as possible, and early payments to contractors can assist with this. We could also consider different reinstatement methods or materials where economic and appropriate, and a single contractor approach if it saves time and reduces BI costs. Where plant and machinery are being assessed, we could look at suitable second-hand equipment. Early cash settlements might also assist the customer in terms of cash flow and help manage uncertainty for both policyholders and insurers.
Essentially, everyone in the insurance industry wants to avoid any reduction in settlements due to under-insurance or shortfalls if the sums insured are exhausted.
Adequacy of cover
Given the current economic climate, it really is essential that businesses regularly review the value of their assets. If the sums insured aren’t up to date, the impact of the continued and projected levels of inflation could be dramatic.
Long lead times on materials can affect the speed of building repairs, which means business interruptionperiods will be extended. Replacement machinery and stock are also likely to take longer to source, which will again impact the early recovery of the business.
The time to review sums insured and business recovery plans – across both material damage and business interruption maximum indemnity periods – is now. This will help customers steer through any period of disruption and emerge stronger. While worldwide economic uncertainty continues, it’s more important than ever to ensure that we are ready and fully equipped to manage the challenges ahead.