- Fire, natural catastrophes, faulty workmanship
- Top causes of insurance claims by business
- Industry faces exposure to Ukraine war
In a five-year period, 2017 to 2021, a comprehensive global analysis of 530,000 insurance claims across over 200 countries and territories has found that insurance companies involved in the claims settlement handled approximately €88.7 billion or $90.59 billion, paying out as much as €48 million or $49.02 million every day for five years.
Described as one of the industry’s most comprehensive analyses, the report, “Global Claims Review 2022” and produced by Allianz Global Corporate & Specialty (AGCS), a part of insurance giant, Allianz, identified to be at the top as causes of loss for companies from analysing more than 530,000 insurance claims to be fire and explosion, natural catastrophes and faulty workmanship or maintenance.
According to the analytical report, almost 75 percent of financial losses arise from the top 10 causes of loss, while the top three causes account for close to half or 45 percent of the value.
It also found that despite improvements in risk management and fire prevention, fire/explosion (excluding wildfires) remains the largest single identified cause of corporate insurance losses, accounting for 21 percent of the value of all claims.
In the last five years, it estimates that fires have resulted in more than €18 billion or $18.38 billion worth of insurance claims over five years, according to the analysis, adding that the average claim totals come to around €1.5 million or $1.53 million.
Natural catastrophes were the second top cause of loss globally by value of claim, accounting for as much as 15 percent of the claims.
The report also showed that collectively, the top five causes (based on more than 20,000 claims around the world) – hurricanes/tornados at 29 percent; storm at 19 percent; flood at 14 percent; frost/ice/snow at nine percent and earthquake/tsunami at six percent account for 77 percent of the value of all disaster claims.
It stated that hurricanes and tornadoes are the most expensive cause of loss, driven by the fact that two of the past five Atlantic hurricane seasons (2017 and 2021) now rank among the three most active and costliest on record, as well as recent record-breaking tornado activity.
“Insurers are also seeing new scenarios. During 2021, the ‘Texas Big Freeze’ in the US and flooding in Germany stood out as events that were both large but had unexpected claims. For example, the ‘Texas Big Freeze’ in February caused huge disruption to infrastructure and manufacturing, with many companies forced into shutdowns by widespread power outages, resulting in property damage and in some large contingent business interruption (CBI) losses. This event alone is estimated to have caused economic losses up to $150 billion,” the report stated.
It found that faulty workmanship/maintenance incidents are the third top cause of loss overall (accounting for nine percent by value) and are also the second most frequent driver of claims (accounting for seven percent by number, ranking only behind damaged goods with 11 percent). The report explained that costly incidents can include collapse of building/structure/subsidence from faulty work, faulty manufacturing of products/components or incorrect design.
The other top 10 causes of loss are: aviation collision/crash at nine percent is the fourth; machinery breakdown at five percent the fifth; defective product is the sixth with five percent; shipping incidents accounted for three percent and is at seventh; damaged goods is at eight percent with three percent; while negligence and negligence/misadvice are at the ninth position with two percent; and in tenth position with two percent is water damage.
“Insurance claims from companies have become more severe over the past five years due to factors such as higher property and asset values, more complex supply chains and the growing concentration of exposures in one location, such as in natural catastrophe-prone areas,” says Thomas Sepp, chief claims officer, AGCS, and also a board.
He added: “The future does not look brighter anytime soon. Companies and their insurers have shown resilience to weather the loss impact of the pandemic, but the ongoing war in Ukraine, a spike in the cost and frequency of business interruption losses and the sustained elevated level of cyber claims are creating new challenges. At the same time, the top two causes of claims, fires and natural hazards, remain significant loss drivers for companies. Last but not least, the impact of soaring inflation around the world will bring further pressure on claims costs.”
The report also did a deep dive on the impact inflation is having on insurance, noting that inflation puts undervaluation of assets in the spotlight, and eventually, it puts pressure on claims costs from multiple angles.
“Property and construction insurance claims, in particular, are exposed to higher inflation, as rebuilds and repairs are linked to the cost of materials and labour, while shortages and longer delivery times inflate business interruption (BI) values. Other lines of insurance, such as directors and officers, professional indemnity and general liability, are also susceptible to inflationary pressures through rising legal defence costs and higher settlements,” stated the report.
“Replacement costs more and replacement takes longer, and this means both the property damage and the business interruption loss are likely to be significantly higher,” Sepp said, adding that, “Updating insured values for all new contracts is therefore a pressing concern for insurers, brokers and insureds. If this doesn’t happen, our clients run the risk of not being fully reimbursed in the event of a loss, while insurers run the risk of underpricing exposures. The insurance market has already seen a number of claims where there has been a significant gap between the insured’s declared value and the actual replacement value.”
The report also flagged that the business interruption losses are on the rise as it highlighted its growing relevance as a consequence of losses in property insurance, and the fact that CBI claims have reached a new high over the past year.
“Costs associated with the impact of BI following the aftermath of a loss can significantly add to the final bill from an incident. The average BI property insurance claim now totals in excess of €3.8 million [or $3.88] compared with €3.1mn [$3.17] five years ago. For large claims (>€5 million or $5.11 million), the average property insurance claim which includes a BI component is more than double that of the average property damage claim,” the report explained.
It noted that the number of CBI claims has increased year-on-year for the past five years, exemplifying the growing interdependence and complexity of corporate supply chains, and added that the automotive industry alone has seen several CBI events during this period, with the overall growth in CBI claims exacerbated in the last two years by a large loss in the semiconductor manufacturing sector and the ‘Texas Big Freeze’ event.
The claims from these two events more than tripled the number of CBI claims in the previous three years.
The report also pointed out that while not appearing in the top 10 causes of loss, the number of cyber claims has significantly increased over the past few years, driven by the rise of threats such as ransomware attacks, but also reflecting the growth of cyber insurance.
AGCS has been involved in more than 1,000 cyber claims in both 2020 and 2021, compared with fewer than 100 in 2016, the report showed, and the fact that claims frequency has begun to stabilise, however, albeit at elevated levels.
The report also focused on what could be the legacy of Covid-19 and the Ukraine crisis.
According to the report, insured losses from Covid-19 are in excess of $40 billion according to industry estimates, with the bulk of claims coming from event cancellation insurance and BI claims from companies affected by lockdowns. It added also that the pandemic has also had knock-on effects such as stressed supply chains, heightened inflation, and financial insolvencies.
But the road ahead seems rough for the industry, the report notes. “Russia’s invasion of Ukraine is likely to result in a significant, yet manageable, loss for the global insurance industry. Insurers’ exposure to the conflict are limited by war exclusions, which are standard in most property/casualty insurance contracts. Expected insured losses from the war in Ukraine are comparable with a mid-sized natural catastrophe, according to AGCS, but specialist markets like aviation insurance could yet suffer disproportionately,” it noted.