What's Happening?

Why insurance value chain inflation is different to CPI inflation



The South African Reserve Bank (SARB) recently announced its second interest hike for the year, with many experts predicting that even steeper hikes could be on the way. This is against a backdrop in which the rate went from 10% in 2019 to 7% in the last year, with rate increases being announced from November 2021.

While this trend will impact many indebted South Africans, it is not the only inflationary trend that insurance policyholders need to know about, as there are a number of inflationary trends that are impacting claims in the insurance industry.  

What is driving inflation in the insurance industry? 

During the fourth quarter of 2021, numerous reports were published about the rising inflation of vehicle spare parts. This trend has been confirmed from various countries.

According to the German Insurance Association (GDV), vehicle spare prices in Germany increased by 6% from 2020 to 2021, but from 2013 to 2021 the increase was a whopping 44%.

In the US, the CFO of Advance Auto Parts projected an increase in aftermarket vehicle parts caused by supply-chain disruptions caused by COVID-19, labour shortage, wage inflation and the increasing cost and scarcity of raw materials.

In South Africa, prices for spare parts are expected to increase by as much as 60% due to a high demand for spare parts, shortage of raw materials to produce the parts, and rising shipping costs. Even locally produced spare parts increase by 10 to 20% on a regular basis.

This inflation is driven by a shortage of raw materials like iron, aluminium, and plastics due to production being closed down for almost two years.

A similar trend has been seen in the construction industry, with supply chain issues leading to increased component prices and subsequent higher than CPI increases.

All of these did not consider the then-unknown and very serious impact of the Ukraine-Russia war, which is leading to exponential increases in the price of oil and subsequent fuel increases. This will put further pressure on the price of spare parts and rebuilding costs.

This is a global issue, which is expected to be around for some time and no local insurer will be spared the impact of these increases.

We have seen this inflationary trend in the average cost of our claims. In January 2022, the year-on-year average cost of our Building claims increased by 44%, whilst the average cost of motor claims more than doubled compared to the previous year with an increase of 103%.

Where does this leave the insurer and ultimately the policyholder?

It means that insurers must ensure that the automated inflationary increases relating to buildings sums insured are maintained to ensure that policyholders are not out of pocket should they have a claim, especially total loss claims.

It also means that insurers need to realise renewal increases to be higher than the expected CPI of 5.9% to ensure it can continue to meet its claims obligations. 

Below are my top tips for policyholders in the current inflationary environment: 

  • Ensure that your building is adequately insured with the insurer’s inflationary increase on renewal. Rebuilding costs do not equal CPI inflation. This will ensure that your claim amount is not reduced in the event of a valid claim.
  • The price of second-hand vehicles has increased higher than that of the retail prices we source from external databases. Ask your broker or advisor about vehicle options. Remember that your insurer (if you work with a well-known brand) will always aim to be fair to the policyholder in the event of a claim.
  • At the very least, remember that it is likely your insurer will only raise premiums to what they feel is necessary. This is why it is important to be insured with a reputable company. Remember the core principle of insurance is that you pay in accordance with the risk that is introduced to the pool.
  • The best way to avoid renewal increases is not to claim, especially for smaller losses.