Introduction
In 2018 MA Group published a series of opinion pieces called Plugging the leaks, that looked at the group’s data behind all the Escape of Water (EOW) claims it has managed over the years to see if there were are any trends or learnings. There were three parts:
Part 1 – looked at the facts and analysed our data to understand the drivers behind increases in EOW claim values. It broke down EOW claims costs to see where the expenditure was going and to provide answers to the reasons for these cost increases.
Part 2 – looked at the source and severity of EOW claims to understand what was driving the claims in the first place.
Part 3 – looked at the different commercial models that insurers use and explained how each model creates different behaviours in supply chains which also affect the value of EOW claims.
This opinion piece examines the data since 2018 to see if any of our findings and conclusions from 2018 have changed.
The problem
Five years on we have all had to deal with some significant external factors, such as Brexit, Covid-19, the Ukrainian war, inflation and a cost-of-living crisis. These external factors have created a lot of volatility in material prices, particularly in the construction sector because of challenges in the materials supply chain. Since 2018, we have seen the following increases in cost indices, demonstrating that inflation in the construction sector has been higher than elsewhere:
According to the ABI, £1.8 million a day is paid out on EOW claims. That is an increase of approximately 42% since 2017. It is generally accepted that the increase in indemnity spend is due to:
Insurers have seen increasing indemnity spend on EOW claims for many years now and all are looking at a variety of ways to reduce this spend such as:
All of these solutions assume that the problems are caused by the customer and the building industry. And while customer’s expectations and plumbing and construction techniques play their part in this problem, there are many other factors involved, and we explained many of these in our 2018 paper.
So how have costs evolved, are the same factors at play and are we seeing similar patterns or new ones emerging?
Here at MA Group over 70% of the claims that we manage are EOW claims and so, with over 27 years of experience, we know a thing or two about managing them. We have used our Business Intelligence software to analyse our claims data and to understand what is going on.
We hold data on over £350 million worth of EOW property claims, ranging from £1,000 to £150,000 in claim value. Our data is based on the work we have done for all our clients across several commercial models including those where the claim is led by surveyors, loss adjusters, restoration companies and building repair networks (BRNs). Our data also includes several different schedules of rates and pre-scoped and BRN scoped claims.
Evolution of costs – inflation
When we first carried out our data analysis in 2018 the UK had been experiencing a prolonged period of low inflation and interest rates, but average EOW claim values had increased by 31% from 2013 to 2018 – an increase that couldn’t be attributed to general inflation. Things have been very different over the last couple of years. Since 2021 we have seen significant volatility in prices that we had not experienced in the previous years. These increases in costs have had an impact on the average cost of all claims. These impacts are felt immediately in the case of variable cost items (provisional sums) and over time for fixed priced scheduled line items (dependent on frequency of price reviews).
In recent years the construction sector has faced higher price increases for materials in comparison to the CPI. The graph below shows how material costs have increased compared to the CPI:
So much of the increase in average EOW claim values since 2018 must be due to construction industry inflation. But the average value of claims has increased due to other factors that are often overlooked.
Evolution of costs – other factors
Excesses
Excesses have continued to increase over the last five years and. Our recent paper on excesses, Moderating our Excesses, demonstrated that over the last 12 years we have seen a 128% increase in the average we are required to collect before we proceed with the works.
Excesses continue to contribute towards EOW claim cost increases. From 2018 to 2022 average excesses have increased by 43% and this is in line with the increase in overall indemnity spend across EOW claims over the same time period. This has arisen because some insurers have strategically increased excesses and many customers reduce their premiums by accepting higher voluntary excesses. Higher excesses reduce the incentive for customers to make small claims, which naturally increases the overall average claims value.
Mechanical drying
Over the last 20 years property insurers have increasingly used specialist drying companies. This has led to an increase in the use of mechanical drying. Mechanical drying continues to be a cause of EOW claim inflation.
Mechanical drying is very effective when used correctly, for example flooding and larger EOW claims. But often it is used when it’s not needed, adding extra unnecessary costs to an EOW claim. Not only do these extra costs include the costs of the drying equipment, but they also include unnecessary strip out costs such as removing and replacing plaster that would not be needed with more appropriate and targeted drying approaches. In many EOW cases simply opening the window and letting a room dry naturally is the most effective approach.
Here at MA Group we work under a number of different commercial models for different clients. In one of those models MA Group appoints the restoration company directly following our triage process. For these claims we can use our digital innovation, TREVOR, which results in fewer drying regimes being implemented. Where regimes are implemented, they are controlled and monitored by MA Group to minimise drying times and costs. In other models the restoration company has already been appointed prior to our involvement.
The graphs below compare the data for the two different models: Client A lets us manage the drying process, Client B appoints restoration companies prior to our involvement. The difference between the two is significant, with drying regimes being implemented twice as often with Client B.
Alternative accommodation
The use of alternative accommodation has become more prevalent as more customers are unwilling to stay in a property whilst major works, such as a kitchen refit, take place.
There are more innovative and cost-effective approaches available that weren’t around in 2018, such as temporary kitchens and bathrooms, which insurers could be using more. Also, when ineffective drying regimes are used, alternative accommodation costs escalate unnecessarily.
Types of room affected
According to our data the average EOW claim value has increased by 31.37% since 2018. The average number of rooms affected in an EOW claim has increased from 3.09 in 2018 to 3.29 in 2022, a 6.5% increase. This increase is smaller to that found in our previous analysis in 2018.
The data on the types of room affected hasn’t materially changed in the last five years with a few exceptions. Hall, stairs and landing consistently continues to feature in more EOW claims than other room classifications, suggesting that the hall, stairs and landing are still the most likely areas to be affected by an EOW (as they are normally adjacent to bathrooms and kitchens).
Other rooms include airing cupboards, lofts, cloakrooms etc. These rooms are now affected in 16.4% of claims compared to 9.7% in 2018. In terms of volumes, this is a 68% increase since 2018. This trend was clear in the 2018 data and could be due to more water tanks and boilers going into lofts and airing cupboards and more cloakrooms being installed in homes.
Average cost per room
Most of the increase in indemnity spend arises in kitchens (52% increase from 2018 to 2022) and bathrooms (75% increase). The cost for all other rooms has increased in line with or below the construction price indices. It is worth noting at this stage that both kitchens and bathrooms contain more provisional sum costs (variable costs based on the purchase price at the time) than the other rooms and therefore are subject to more volatility.
In 2018 we also found that most of the increase in indemnity spend arose in kitchens and bathrooms. However, the cost increases were 30% and 39% respectively, significantly less than the above increases from 2018 to 2022. This demonstrates the significant impact that inflation has had on EOW claims since 2018.
In bathrooms we are seeing the highest cost increases in floor and wall finishes and plastering (same as in our 2018 article), and in plumbing costs too. Both these areas have a higher number of variable costs (provisional sums) and we believe result from the increased number of fully tiled bathrooms.
In kitchens we are seeing the largest cost increases in floor and wall finishes and in joinery (kitchen units and worktops). Again, all other costs have remained relatively consistent over the years. These findings are the same as in our 2018 article, and again relate to high levels of variable costs (provisional sums).
In all rooms we are seeing significant increases in floor and wall finishes costs in absolute terms and as a percentage of the overall claim value. Since 2018 flooring costs have increased from 20.95% of the claim value to 26.18% in 2022.
Matching items
In our previous review of EOW claims we saw that insurer’s contributions towards matching items were having an impact on EOW claim values. We have seen this behaviour change and the level of contributions towards matching items has reduced significantly since then.
Our analysis shows that matching items contributions were made on 2.6% of claims for 2018 to 2022 compared to 9% 2013 to 2017. This is a significant change in approach by insurers. 90.9% of these contributions related to kitchens or kitchen units and the average of these contributions overall was £2,035.
Source of leaks by room
Over the last five years 49% of leaks have started in the bathroom and 20% have started in the kitchen. 8% of EOW claims have started in the loft. This data is very similar to that from 2018, the leaks are still happening in the same locations.
The table below shows the relative severity, in terms of value, of leaks originating in the different rooms of a house. Bathrooms are the benchmark at 100.
Typically, EOW claims in communal areas tend to damage more than one property and so they tend to be the most severe claims, but their frequency is very low at just 0.36%.
The same applies to leaks originating in adjoining properties such as the flat above or the property next door. These are of low frequency but are higher in value as they are dependent on third parties ensuring the leak is repaired swiftly. Some of these cases involved trace and access as it was initially unclear from where the leak originated.
Claims for kitchen leaks tend to have a higher cost profile than those originating in bathrooms. This is in line with what we saw in the 2018 data.
Bathrooms
27% of leaks in the bathroom come from the WC and another 24% come from showers. These findings support the view that modern plumbing fittings are the cause of many EOW claims. Pipes account for 21% of claims and the bath accounts for 9%. Failed seals account for 4%.
The table below shows the relative severity, in terms of value, of leaks originating in the bathroom. WC is the benchmark at 100.
The most severe leaks are caused by multiple leaks and drains but their frequency is low at 1.21% and 0.24% respectively.
In our previous analysis in 2018, leaks from the WC the third highest cause of severity. For this analysis the WC has dropped in severity and there are several different sources which are higher. Leaks that originate in the pipes are 20% more severe in value than those in the WC, but previously they were 20% less severe.
24% of leaks come from showers but their severity is low compared to pipes and WCs, so their impact on indemnity spend is not as significant as the frequency figures would suggest.
WCs and pipes are the largest cause of indemnity spend on bathroom EOW claims as their frequency and severity are relatively high. As pipes run through the house and more bathrooms are on the first floor it is easy to understand why pipes are such an issue.
Indemnity spend on WCs tends to be higher than leaks from showers and taps due to the nature of the leak – contaminated water will always cost more to clean up.
Kitchens
Pipes are the main source of leaks in the kitchen as well as the bathroom. 41% of leaks in the kitchen are caused by pipes and another 19% is caused by sinks with 15% being caused by washing machines. The dishwasher accounts for another 11% and the stop cock 9%. These figures clearly highlight how modern appliances have contributed to the increase in EOW claims in the home.
The table below shows the relative severity, in terms of value, of leaks originating in the kitchen. Pipes are the benchmark at 100.
Taps cause the most severe leaks, being 60% more severe than a leak from a pipe. The frequency of these however is only 2.44%. Leaks from taps and stop cocks tend to be more severe as these occur whilst the homeowner is away, so the damage builds up.
Pipes are clearly the main cause of leaks in the kitchen, which is no surprise when you consider how many pipes are running throughout the kitchen linking up appliances, sinks, taps and the drains. This is further evidence that modern plumbing techniques are causing many EOW claims.
Water leaks in the kitchen are more severe than those originating in the bathroom even though fewer rooms are damaged by an EOW in the kitchen. This is consistent with our previous findings.
Conclusions
This is quite different to the situation the industry was experiencing in 2018 when we looked at the data from 2013 to 2017. Much of this has been driven by variable costs (provisional sums) because fixed, scheduled line items are contracted and only change following annual reviews.
To minimise increased costs due to inflation clients should ensure that the schedule of rates they use is fit for purpose and that it minimises the need for provisional sums. MA Group’s National Schedule of Rates is fair and independent, based on industry standards designed for the work we do, and ensures that 80% of works are priced using contracted, fixed line items, so minimising provisional sums that increase immediately with inflation.
These findings are unchanged from 2018. Costs incurred (including alternative accommodation costs) due to unnecessary and poorly designed drying regimes can be vastly reduced by not appointing a restoration company straightaway. MA Group’s effective triage processes and industry-leading TREVOR technology is reducing claim durations by 21 days and average claim values by £600. To find out more please read our Technical Briefing – The science of drying.
This is the same percentage increase seen from 2013 to 2017. The increase in the average number of rooms affected in an EOW claim has increased from 3.09 in 2018 to 3.29 in 2022, a 6.5% increase, much less than the 22% increase we were seeing in 2018. Hall, stairs and landing are still the most likely areas to be affected by an EOW. The same variable costs (provisional sums) items in kitchens and bathrooms are driving claim costs upwards, enhanced by the high material inflation we have seen thanks to Brexit, Covid-19 and the Ukraine war.
This is because their frequency and severity are relatively high. Pipes and appliances are the largest causes in kitchens. In kitchens average EOW claim values tend to be higher than in bathrooms due to the large variable costs (provisional sums) they often involve.
Since 2018 insurers have clearly been aware that contributions towards matching items had been driving claim costs upwards and they are now applying insurance policy terms more strictly.
Clients that use MA Group’s model and allow us to triage claims using our TREVOR technology and integrated claims management service are seeing much better EOW claim cost and duration profiles compared to those of our clients that use other more siloed models. Our position remains unchanged since 2018. To slow the rate of increase of EOW claim costs insurers need to:
If you would like to reduce your complaint levels and benefit from MA Group’s innovative solutions to enhance your customers’ claim journeys, please get in touch, we would love to talk to you.
