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Policyholders face ramifications of insurance claims inflation

Industry experts believe insurance claims inflation is now running at around 10% with the Bank of England issuing a statement warning about the inflationary factors impacting the wider UK economy.

Against this background it is important that policyholders carefully review the sums insured to confirm they reflect the up to date value of the assets and risk covered.

 It is common for policies to contain “Average” or “Condition of Average” clauses which allow an insurer to reduce the sum paid out on a claim in proportion to the value insured where it is found that the assets covered by the policy were insured, whether deliberately or accidentally, for less than their full value.

Consequently, the premium paid will have been calculated in relation to the sum insured. If underinsured, a policyholder will only have paid part of the premium that would have been applied had the true value been declared and will only benefit from the proportion of cover which has been paid.

Under the Insurance Act 2015 a policyholder’s failure to disclose the true (higher) value of the property/risk insured can be shown to amount to a breach of its duty of fair presentation. Where an Insurer can show that it would have charged a higher premium but for that breach it can reduce proportionately the amount paid to that required under the terms of the policy.

The Bank of England expects inflation to keep rising until it hits 10% before falling back in two years’ time which confirms there will be no quick solution to the situation.

In statement the BoE said: “In early 2022, Russia’s invasion of Ukraine led to more large increases in the price of things like energy and food. The lockdowns in China (due to Covid) are also making it harder to import some goods to the UK. So that is pushing up prices too. These two factors explain the large majority of the increase in inflation.

“At home, unemployment is low and the labour market strong, which has led to an increase in wages – a major element of the costs of service-sector businesses. So we’ve started to see the price of services in the UK go up too. 

“These are all reasons why we expect inflation to keep rising. It is hard to predict the future, but we think it’s likely to reach around 10% this year and go down next year. We expect it to be close to 2% in around two years.”

It should be noted that the Construction Leadership Council (CLC) has warned that over the last three months inflation has increased by 10-15% on materials prices. The CLC says this is likely to drive up the cost of materials and impact those working on self-build, renovation and extension projects.

It was estimated the cost of construction materials, including timber, cement, and plastic products, had risen by 21 per cent over the year to January and the increase in the price of raw materials in March was the highest for six months.

The Russian invasion of Ukraine has caused significant disruption to supply chains and there is a warning of more problems to come. "The impact of the war in Ukraine is only beginning to be felt by UK construction," said the CLC.

W Denis Group provides insurance broking services to a wide range of industries and professions, across, multiple classes of insurance. To speak to an expert, please make arrangements via daniel.moss@wdenis.co.uk  or on 0044 (0) 113 243 9812.

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