Fire and explosion, natural catastrophes, and faulty workmanship or maintenance have been the major causes of loss by value of insurance claims over the past five years, according to a new study from Allianz Global Corporate & Specialty (AGCS).
“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,” said Thomas Sepp, chief claims officer and board member at AGCS. “The future does not look bright 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 – fire 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.”
Inflation puts pressure on claims costs from multiple angles, AGCS said. Property and construction insurance claims are especially exposed to high inflation, as rebuilds and repairs are linked to the cost of materials and labor, while shortages and long delivery times pump up business interruption costs. Other lines of insurance, including directors and officers, professional indemnity and general liability, are also susceptible to inflation pressures through rising legal defense costs and higher settlements.
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“Replacement costs more and replacement takes longer, and this means both the property damage and business interruption loss are likely to be significantly higher,” Sepp said. “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 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.”
For example, in a claim for commercial property destroyed during the 2021 Colorado wildfires, the rebuild value was nearly twice the declared value thanks to a combination of inflation, damage surge and underinsurance, AGCS said.
For its report, AGCS identified the top causes of loss from more than 530,000 insurance claims in more than 200 countries and territories between 2017 and 2021. Those claims had an approximate value of €88.7 billion (about $90.17 billion), meaning that insurance companies have paid out an average of more than €48 million (about $48.8 million) every day for five years to cover losses.
The analysis found that almost 75% of financial losses arose from the top 10 causes of loss, while the top three causes accounted for 45% of the value.
Despite improvements in risk management and fire prevention, fire/explosion (excluding wildfires) was the largest identified cause of corporate insurance losses, accounting for 21% of the values of all claims. Fires resulted in more than €18 billion worth of insurance claims over five years, with the average claim totalling around €1.5 million.
Natural catastrophes ranked second. Collectively, the top five natural catastrophe causes – hurricanes/tornadoes (29%), storm (19%), flood (14%), frost/ice/snow (9%), and earthquake/tsunami (6%) – accounted for 77% of the value of all disaster claims. Hurricanes and tornadoes were 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.
Faulty workmanship and maintenance incidents were the third top cause of loss overall, accounting for 9% of total claims value. They were also the second most frequent driver of claims, ranking only behind damaged goods. Costly incidents can include collapse of building/structure/subsidence from faulty work, faulty manufacturing of products or components, or incorrect design.
The other causes of loss in the top 10 were:
- Aviation collision/crash (9%)
- Machinery breakdown (5%)
- Defective product (5%)
- Shipping incidents (3%)
- Damaged goods (3%)
- Negligence/misadvice (2%)
- Water damage (2%)
The report also highlighted the growing relevance of business interruption as a consequence of losses in property insurance, as well as the fact that CBI claims have hit a new high over the past year. The average BI property insurance claim now totals in excess of $3.86 million.
While not appearing in the top 10, the number of cyber claims has also spiked significantly over the past few years, driven by a rise in ransomware attacks, but also reflecting the growth of cyber insurance. AGCS was involved in more than 1,000 cyber insurance claims in both 2020 and 2021, compared to fewer than 100 in 2016.