Introduction
Escape of water claims (EOW) are a large and growing issue, as everyone in the property insurance industry knows. There is more water flowing through people’s homes than ever before and as a result there is more water escaping too – causing almost £2.5 million of damage every day (according to the ABI).
Insurer’s profits are leaking away into ever-increasing escape of water claims costs. This paper, the first in a three part series, looks at the facts and analyses our data to understand the drivers behind increases in escape of water claim values. We break down escape of water claims costs to see where the expenditure is going and provide answers to the reasons for these cost increases.
In Part 2 we will look at the source and severity of escape of water claims to understand what is driving the claims in the first place. And in Part 3 we will look at the different commercial models that insurers use and explain how each model creates different behaviours in supply chains which also affect the value of escape of water claims.
The problem
According to the ABI, in the first nine months of 2017, domestic EOW claims cost the industry £483 million – this is a 24% increase on 2014. The average cost of such claims has risen by 31% to £2,638 over the same period. It is generally accepted that the increase in indemnity spend is due to:
Insurers have seen increasing indemnity spend on escape of water claims for several years now and all are looking at a variety of ways to reduce this spend such as:
But 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, which we explain in our findings.
Here at MA Group over 70% of the claims that we manage are escape of water claims and so, with over 20 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 have data on over £200 million worth of EOW reinstatement claims, ranging from £1,000 to £150,000 in size. Our data is based on the work we have done for all of our clients across several 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.
Other factors
The average value of claims has increased due to other factors that are often over looked.
Excesses
Excesses have increased significantly over recent years. Typically 5 years ago an excess would be £100 but now excesses of £500+ are not unusual. This has arisen because some insurers have strategically increased excesses, especially on escape of water claims, and many customers seek to reduce their premiums through more transparent online purchasing and greater awareness of the link between excesses, premiums and claims history.
Higher excesses reduce the incentive for customers to make small claims, which naturally increases the average claims value.
Mechanical drying
Over the last 15 years property insurers have increasingly used specialist drying companies. This has led to an increase in the use of mechanical drying.
Mechanical drying is very effective when used correctly, for example flooding and larger escape of water claims. But often it is used when it’s not needed, adding extra unnecessary costs to an escape of water 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 escape of water cases simply opening the window and letting a room dry naturally is the most effective approach.
Here at MA Group our contractors are trained on the most effective and economic ways of drying properties. Our MA Dry training scheme has created significant cost savings and reduced claim durations for our clients that let us manage the drying process. The graphs below compare the data for two of our clients – Client A that lets us manage the drying process and Client B that uses restoration companies. Only 14% of claims for Client A incur drying costs, but for Client B 26% of claims involve drying.
Asbestos removal
Our findings are similar for asbestos removal – only 5% of claims where we manage the reinstatement works and asbestos works incur asbestos removal costs. But 11% of escape of water claims involve asbestos removal where the asbestos testing and removal is done by a separate company appointed by the insurance client.
Alternative accommodation
The use of alternative accommodation has become more prevalent as more customers are unwilling to stay in a property while major works, such as a kitchen being refitted, take place.
There are more innovative and cost effective approaches that can be taken, such as temporary kitchens and bathrooms. And when ineffective drying regimes are used, alternative accommodation costs escalate unnecessarily.
Leak detection and asbestos removal
Over the last 10 years trace and access cover has become a standard part of property insurance policies. As a result specialist companies and services have sprung up to meet demand. This contributes around £400 to the cost of an EOW claim – a cost that the customer would have incurred directly a few years ago.
Type of room affected
According to our data the average EOW claim value has increased by 31%, in line with the ABI’s data. The average number of rooms affected in an escape of water claim has increased from 2.25 in 2013 to 2.76, a 22% increase. This suggests that the severity and extent of escape of water claims has been increasing.
The data on the types of room affected is surprising. Hall, stairs and landing consistently feature in more escape of water claims than other room classification, suggesting that the hall, stairs and landing are the most likely areas to be affected by an escape of water (as they are normally adjacent to bathrooms and kitchens).
As bathrooms increasingly tend to be on the first floor or above, the extent of the damage from bathroom claims is more severe than it used to be, as floors below are often affected by the escape of water as well.
Historically an escape of water was more likely to occur in the kitchen than the bathroom, but over time that has changed. In 2012 22% of EOW claims occurred in the kitchen, with 17% occurring in the bathroom. In 2017 it has become equally likely that an EOW originates in the bathroom – 19% of EOW claims started in the bathroom and 19% started in the kitchen.
Average cost per room
Most of the increase in indemnity spend arises in kitchens (30% from 2013 to 2017) and bathrooms (39% from 2013 to 2017). The cost for all other rooms has increased in line with inflation.
In bathrooms we are seeing the highest cost increases in floor and wall finishes and plastering. Plastering costs are linked to tiling costs as the removal of tiling almost always creates damage to the plaster. Other costs have remained steady over the years.
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 consistent over the years.
In all rooms we are seeing significant increases in flooring costs in absolute terms and as a percentage of the overall claim value. Since 2012 flooring costs have increased from 12.3% of the claim value to 17.1% in 2017.
Matching items
The data on kitchens and bathrooms, along with our experience, shows that more expensive flooring, kitchens and appliances are not the only reason for the increase in escape of water claim values. We are also seeing a change in behaviour by insurers.
More flooring now runs between rooms with no thresholds or other breaks to delineate the rooms, more walls in bathrooms and kitchens are completely tiled from floor to ceiling and there are more fully fitted kitchens. With increased focus on the customer journey, pressure from the FCA and higher customer expectations, insurers are making greater contributions towards matching items even when the customer does not have a matching items clause in their insurance policy.
We have two real life examples:
Matching kitchen doors
During a recent claim we recommended replacing two kitchen unit doors at a cost pf £94 for labour and materials. However, the insurer agreed to make a 50% contribution to matching items at a cost to the insurer of £446 – 4.75 times the original scoped cost. The customer did not have a matching items clause in their insurance policy.
Matching tiling
In another recent claim we scoped for the replacement of 1.33 square metres of blown tiles at a cost of £95.14. To replace all of the tiles would have cost the insurer almost £500 – 5 times the scoped cost.
According to our data, matching contributions are made in about 9% of claims but these tend to be larger claims. For these larger claims matching items made up 30% of the overall claim value – an average of £1,763 per claim.
45% of matching items occur in bathrooms and 35% in the kitchen. 40% of matching items are for tiling, 20% for units and 15% for flooring.
Conclusions
There are many reasons for the increase in escape of water claim values over the last 5 years, and our data suggests that some of the assumptions made by the property insurance industry are incorrect.
Our data tells us that reinstatement costs have generally increased in line with inflation and that the significant increases in claim costs are occurring in bathrooms and kitchens. These cost increases are due to flooring and tiling in both rooms and plastering in bathrooms and joinery in kitchens because of:
By understanding the breakdown of the increasing costs, insurers can change their approach to claims management and underwriting to help reduce the costs. For example in many escape of water claims specialist drying companies are not needed and the claim durations and values can be reduced through the use of a suitable BRN. An understanding of how many bathrooms there are in a house and where they are positioned can help underwriters assess risk and price a policy more effectively.
Part 2 of this series will look at the cause and severity of escape of water claims, identifying the reasons for the escape of water claims in the first place and what makes a claim more severe than others.
Part 3 will look at the different commercial models and schedules of rates that insurers use and how these different models and rates drive different behaviours in claims handlers and the supply chain that impact indemnity spend.
If you can’t wait to find out what Parts 2 and 3 will reveal, and are keen to plug the leaks in your escape of water indemnity spend, we would be delighted to share more information with you. If you are interested in managing indemnity spend without damaging customer service, please get in touch.
Our data is extensive:
Such extensive data can only be analysed effectively with data mining software such as our powerful Business Intelligence Software, Tableau. Tableau:
Tableau gives us an insight into claim cost drivers and we’re now able to further analyse information by supplier, client and commercial model. It is providing visualisation, information and analysis to help us ask more questions and to drill down to gain a better understanding of trends affecting the wider insurance market. Tableau is helping us to improve efficiencies across all our processes and we are reinvesting the time saved back into the business.
As all of our contractors follow the MA Dry process, we know that unnecessary drying and the related costs do not take place.
All MA Dry technicians are MA Dry accredited. This means that each supplier has completed a mandatory three-day training course. This includes two days spent studying the science and theory of drying out water damaged properties and one day learning practical skills, such as how to carry out a proper moisture survey with the correct equipment.
MA Dry ensures that properties are dried using the most efficient and intelligent method. So if, for example, just one wall needs drying out, we will use a ‘one wall tent’ to ensure that the most appropriate drying regime is directed more effectively at the affected area rather than being used to dry out the whole room. This has the effect of speeding up the drying process and reducing the money spent on utility bills.
Using the MA Dry process we manage the drying out work in a property as well as the building restoration service, in many cases simultaneously. Savings of up to 30% are achieved, when compared to the traditional methods used by others, by speeding up the drying process and reducing the amount spent on utility bills and alternative accommodation for the customer.
