Insurance consulting firm Xceedance says claims inflation, currently a major issue for the insurance industry, may potentially worsen if a new disruptive covid variant emerges.

For now Xceedance predicts it will be another year before claims inflation eases if no major external factors break out to add more strain on already stretched global supply chains.

“Assuming no more virulent strains of Covid-19 emerge and create further disruption, it will likely be 12 months before supply chains return to ‘normal’, easing pricing pressures there,” Xceedance Australia Client Executive Martin Jones told insuranceNEWS.com.au.

“However, rising fuel prices could impact on supply chains as well, creating more cost pressures.”

Xceedance says the pandemic is partly to blame for driving up claims inflation as months of lockdowns since March 2020 around the world have upended the global supply chain, resulting in material shortages.

Insurers are affected by the supply squeeze as it means they have to pay more to secure imported building materials such as timber, all of which feeds into claims costs.

IAG and Suncorp at their recent half-year earnings update say the businesses are experiencing underlying claims inflation.

“Dramatic increases in the cost of building products and auto parts have a knock-on effect for insurance claims,” Mr Jones said.

“My discussions with insurers confirm that claims inflation is a major issue for them now and spans across most product lines.”

Xceedance urges the insurance industry to consider developing strategies to counter rising claims inflation, cautioning supply chain disruption is not the only factor adding to cost pressure.

Social inflation in litigation awards in the court system have “set the bar high” and fuelled claimants’ expectations about what they were entitled to, according to the consultant.

“The spike in litigation award amounts is not as serious as in the US, where quantum is often determined by juries, but Australia is following the US trend of higher damages awards,” Mr Jones said.