Insurance claims for businesses in North America have become more severe over the past five years due to factors like higher property and asset values, more complex supply chains, and the growing concentration of exposures in natural catastrophe-prone locations.
“The future does not look brighter anytime soon,” said Thomas Sepp, chief claims officer and board member at Allianz Global Corporate & Specialty (AGCS). “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. […] Last but not least, the impact of soaring inflation around the world will bring further pressure on claims costs.”
According to the AGCS Global Claims Review 2022, built on analysis of more than 530,000 insurance claims from 2017 to 2021, with a total value of €88.7 billion (approx. CA$115.7 billion), the leading causes of loss in North America over the past five years were natural catastrophes and fire/explosion.
Specific to natural catastrophes, AGCS found that hurricanes and tornados 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, as well as recent record-breaking tornado activity. Both Canada and the US have also suffered significant wildfire seasons in recent years, as well as consistent flooding.
Frank Sapio, head of claims in North America for AGCS, said it’s “not surprising” that natural catastrophes were top of the list, given the uptick in frequency and severity of severe weather events across the entirety of the continent. The claims head also said he doesn’t see this exposure getting better any time soon due to the changing climate.
“I think information is the biggest commodity we have in mitigating climate risks,” Sapio told Insurance Business. “Reports like the AGCS Global Claims Review 2022 help risk managers to understand how losses could potentially impact their operations. If we can inform the risk management community around how to mitigate and how to recognize the exposure, that’s half the battle. The other half of the battle is having a safety culture and understanding what to do in the event of a loss.”
Despite improvements in risk management and fire prevention over the years, fire/explosion (excluding wildfire) is the top cause of corporate insurance losses globally, accounting for 21% of the value of all claims, according to the AGCS analysis. Again, Sapio said there’s “no surprise there”.
“Typically fires and explosions are caused by human failure, either operational failure or design failure,” he said. “What can we do about that? Again, there’s no magic bullet for this one. Any time humans are involved in an activity, there will be failures and those failures will result in loss. It’s just a matter of continual education and risk mitigation activities, such as loss control inspections, and pre- and post-loss evaluations, etc.”
What was surprising in the five-year period of 2017 to 2021 was the emergence of the novel coronavirus (COVID-19) and the ensuing global pandemic, which triggered a huge slowdown in economic activity, as well as astronomical shifts in the way businesses operated. Russia’s invasion of Ukraine and the ongoing war is another wildcard for businesses, and their insurers, to deal with.
“It goes to show that when you think you have it all figured out, and you know what the year is going to hold, you don’t,” Sapio reflected. “The COVID-19 pandemic and the war in Ukraine were both risks that emerged quickly, and the whole world had to adapt.
“The COVID situation had a weird impact on our claims in that the volume went down because of reduced economic activity, yet it introduced a lot of uncertainty in the industry. It’s the same with the war in Ukraine. It didn’t impact our claim volume, but it’s impacted inflation and other factors. It came out of the blue, and we had to deal with it very quickly. If we’ve learned anything, it’s how to adapt quickly to a changing environment.”
One of the key takeaways of the AGCS Global Claims Review 2022 for brokers is the impact of soaring inflation on claims costs. 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 defense costs and higher settlements.
“Brokers have to ensure their clients understand the importance of properly evaluating their assets, and the risk of being underinsured,” Sapio emphasized. “More and more insurance carriers are starting to put insurance-to-value clauses into their contracts [in response to] a rise in claims where there has been a significant gap between the insured’s declared value and the actual replacement value. This is also a great opportunity for brokers to talk to clients about loss control and pre-loss activities to minimize or eliminate exposure.”
