Partner Article

Cost of property claims doubles in last decade

The average cost of property damage claims has more than doubled in the last ten years, with payouts totalling £4bn a year, according to research conducted by insurance and risk law firm BLM.

Commissioned in conjunction with the Institute of Directors, the research considers the impact of past, present and future macroeconomic trends on property damage claims. It reveals that between 2004 and 2014, average claim values have risen from £1,144 to £2,298, with weather-related claims in particular soaring from £986 per claim to £2,303 over the period.

This underlines the growing financial risk that property damage claims present for insurers, following recent estimates by the Association of British Insurers (ABI) that damage caused by this winter’s floods will reach £1.3bn. Government cuts of 13 per cent to flood protection spending between 2010 and 2013 has exacerbated this, and ongoing austerity policies further increases the number and cost of future claims.

The report also highlights the potentially enormous costs that could be accrued by companies in the renewable energy sector with extreme weather, design flaws and pollution expected to drive claims in the coming years. Estimates suggest that government spending in the sector has exceeded £40bn since 2010, greater than transport, water and communications combined, and a further £48bn is required to hit government renewable energy targets of 15 per cent by 2020.

The post-recession property boom is also expected to have an impact on claims, with the growing demand for qualified builders leading to a skills gap in the construction industry. With a 2015 survey showing an 11 per cent increase in towers (defined as building over 20 storeys high) and a 25 per cent rise in residential buildings approved or under construction in London, water escape damage claims are expected to escalate due to a lack of technical knowledge as a result of the additional demand.

John O’Shea, partner at BLM, said: “The £1.3bn in payouts expected from the winter’s flooding has dominated headlines over the last few months, but barely scratches the surface of potential claims and costs that could be accrued in the coming years.

“Against a global economic backdrop of cautious optimism, changes like government cuts to flood defence budgets, the creation of new technologies and a growing skills shortage in the construction industry can have dramatic consequences.

“Insurers can take a number of steps to manage this. In relation to flooding, using up to date flood mapping can be critical to identifying the high risk areas, as well as working closely with the new Flood Re scheme to be able to offer cover whilst maintaining acceptable retained exposures. On a wider scale, insurers should consider partnering with the construction industry to encourage further innovative methods to build and improve flood resilient housing.

“However, as we have seen, average claims over the past decade have more than doubled, and this statistic should act as a warning to the insurance industry as they look to stem the tide of claims and prevent significant profit checks.”

This was posted in Bdaily's Members' News section by Pablo Rodriguez .