Top 10 causes of insurance claims
A FIRE at a busy warehouse leaves a company struggling to replace its buffer stock; a ransomware attack paralyses a company’s IT systems; the use of industrial adhesives in manufacturing results in a costly product recall. Every day, companies around the globe (together with their insurers) experience losses, in multiple forms, in the millions of dollars. Over the past five years, fire and ex-plosion, natural catastrophes, and faulty workmanship or maintenance have been the major causes of loss by value of insurance claims, according to the Global Claims Review 2022 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. 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. Inflation puts undervaluation of assets in the spotlight Ultimately, inflation brings 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. 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. 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 under-pricing 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 a commercial property destroyed in the 2021 Colorado wildfires, the rebuild value was almost twice the declared value, due to a combination of inflation, demand surge, and underinsurance. What are the top causes of business insurance claims? In one of the industry’s most comprehensive analyses, AGCS has identified the top causes of loss for companies from more than 530 000 insurance claims in over 200 countries and territories that it has been involved with between 2017 and 2021 (typically a number of insurers provide coverage jointly considering the huge values at stake in the corporate sector). These claims have an approximate value of €88.7 billion, which means that the insurance companies involved have paid out-on average-over €48 million every day for five years to cover losses. The analysis shows that almost 75% of financial losses arise from the top 10 causes of loss, while the top three causes account for close to half (45%) of the value. Despite improvements in risk management and fire prevention, fire / explosion (excluding wildfires) is the largest single identified cause of corporate insurance losses, accounting for 21% of the value of all claims. Fires have resulted in more than €18 billion worth of insurance claims over five years, according to the analysis. Even the average claim totals around €1.5 million. Natural catastrophes (15%) ranks as the second top cause of loss globally by value of claims. Collectively, the top five causes (based on more than 20 000 claims around the world) – hurricanes / tornados (29%); storm (19%); flood (14%); frost / ice / snow (9%) and earthquake / tsunami (6%) account for 77% of the value of all disaster claims. Hurricanes and tornados 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 unprecedented cold weather known as the ‘Texas Big Freeze’ in the US, as well as flooding in Germany, stood out as events that were both large but had unexpected claims. For example, the ‘Texas Big Freeze’ 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. Faulty workmanship / maintenance incidents are the third top cause of loss overall (accounting for 9% by value) and are also the second most frequent driver of claims (accounting for 7% by number, ranking only behind damaged goods with 11%). Costly incidents can include collapse of building / structure / subsidence from faulty work, faulty manufacturing of products / components, or incorrect design. Top causes of loss in South Africa Fires generate the most expensive losses for South African businesses, accounting for more than 60% of the value of all claims over the past five years. Faulty workmanship incidents are another major cause of loss (20%) while natural catastrophes rank third, with storm losses the most frequent driver of these claims. Hailstorm events, while uncommon, can be costly when they do occur if one happens in a metropolitan area. Water damage generates the highest number of corporate insurance claims in South Africa (30%+), although one in five claims also result from crime / wilful acts. South Africa experienced three major claims events in the past three years. COVID-19