A soon-to-be-published report by Crawford & Company Australia has found that following last year’s “perfect storm for rising claims costs,” not much has changed in 2023.
In fact, according to the global claims management provider, claims costs, particularly in the construction sector, are currently under pressures likely not seen ever before.
“The combination of factors driving claims inflation is possibly unprecedented in the post-war era,” said Tim Butler (pictured above), head of Crawford Contractor Connection.
Crawford shared a preview of their September claims inflation update: Continuing cost impact of changing world conditions, with Insurance Business. Much of the report’s data comes from the firm’s own experience managing many thousands of local building and motor claims.
Labour costs continue to be a big driver of claims inflation in the building sector and are still rising sharply – some positions, said the report, by as much as 25% during the last three months.
“While there has been some easing to a number of key supply chain issues around materials mentioned in that Paper, the same cannot be said for labour costs,” the report said.
The update said the Building Cost Index (BCI) continues to outstrip the Consumer Price Index (CPI). For the 12 months up to June, CPI rose by about 6%. The BCI and other building cost indicators show that annual construction costs are increasing at a rate of about 10%.
Overall, building material costs are on average around 1.35 times more today than they were back in 2019, said the report.
Data from property consultancy Rider Levett Bucknall’s August “Escalation Update” was also quoted in the Crawford report. That update quoted other issues playing into construction sector claims inflation including 20% longer project durations, parties struggling to agree on risk allocation and terms and also “pressure from ongoing legacy projects with significant financial shortfalls.”
The report found that business interruption claims in the sector are also suffering “severe” impacts due to the other construction industry challenges. Some projects are “blowing out” to more than twice the length of their original timelines.
“Here at Crawford, we have seen a rise in insureds and advisers seeking to transfer elements of increased building costs to business interruption covers, when material damage cover is inadequate, generating considerable discord when these are rejected,” the update said. “With many building businesses failing thanks to cost overruns, there is a genuine concern for insurers to ensure projects are completed.”
The Crawford report said building supply issues often focus on timber, steel and roofing materials. However, it noted that “construction projects rely on thousands of components.” The update said that difficulties sourcing “even less significant components can have radical delay impacts.”
The update also reported “significant problems sourcing unskilled labour” resulting in “dramatic cost pressures” when skilled trades people need to take responsibility for unskilled tasks.
Regulatory issues are also playing their part, including the difficulty builders face fitting insurance projects under the Building Regulatory Framework.
“The Australian Building Codes are focused on new-build projects, which do not anticipate partial rebuilds after a fire for example,” said the update. “There are limited builders with the skills to work this way.”
The report detailed last year’s role in current claims inflation challenges in the construction sector, including “dramatic rises in the cost of materials, global supply issues and labour shortages.” This coincided with increasing demand in the US and UK post-pandemic for homebuilding and renovations. The delays caused by labour and supply shortages, said the report, “have extended business interruption claim periods.”
In the motor sector, 2022 saw parts and skilled labour challenges, said the report, “particularly for electric vehicle repairs.” Personal injury payouts are also rising in severity, it said and “increasingly sophisticated technology” is increasing the cost of car repairs for insurers.
According to the Australian Automobile Association’s (AAA) Electric Vehicle (EV) Index, almost 15% of the vehicles now sold in Australia are electric or hybrid.
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