Claims inflation has become one of the most significant challenges facing the UK general insurance market. What began as a post-pandemic issue has evolved into a structural shift, driven by rising labour costs, supply chain disruptions, material inflation, and slower claims settlements. As a result, underwriting margins, which are already under pressure, are being tightened, forcing insurers to reassess how they price risk and manage their portfolios.
What’s causing claims inflation?
A combination of issues fuels claims inflation:
Labour shortages and wage pressures – according to a March 2025 report, entitled ‘Construction and Building Trades: The Skills Horizon’ by Dr Hannah Holmes and Dr Gemma Burgess, the UK construction sector has over 140,000 vacancies and it’s set to lose over a third of its skilled professionals by 2035 as they retire. This tight labour market has led to higher wage bills across construction and repair trades, as well as longer repair times, and is pushing up the cost of both property and motor claims.
Supply chain disruption – parts delays, material shortages, energy prices and inconsistent global logistics continue to drive up costs. Parts availability in motor claims remains unpredictable, often delaying repairs and increasing overall costs. Property claims face the same challenge, with longer waits for materials such as timber, steel and specialist components.
Materials inflation – A recent report by the Building Cost Information Service (BICS) predicts that building costs will increase by 15% over the next five years, despite an easing of headline inflation. Neither have automotive components returned to pre-pandemic baseline prices.
Settlement delays – longer claims cycles lead directly to higher costs such as alternative accommodation, extended credit hire and prolonged legal involvement. Each additional delay adds avoidable expense and often pushes claims beyond their originally reserved amounts.
These combined factors mean that loss costs are rising faster than many insurers can adjust premiums, especially in personal lines, where regulatory requirements can limit how quickly premiums can change.
Underwriting margins under strain
The impact on profitability is apparent. Many insurers are finding that their existing pricing assumptions, built on historical trends, no longer reflect today’s realities. Loss ratios in motor, home and some commercial lines reflect this disconnect and remain stubbornly high. The result is pressure on combined opening ratios and a pressing need to restore technical discipline.
Rebuilding pricing discipline
In order to remain profitable, insurers must modernise their pricing approach, moving away from backwards-looking assumptions and towards more dynamic, real-time methodologies.
This means shifting away from static models and adopting more flexible, data-driven methods:
● Use forward-looking indicators – pricing models should incorporate not only historic trends but also broader economic indicators such as commodity prices, wage growth forecasts, supply chain analytics and procurement insight. Quarterly calibration, instead of annual, will help to keep premiums aligned with the true cost of risk
● Improve segmentation and refine ratings structures – granular segmentation enables insurers to pinpoint where inflationary pressures are most acute. For example, older vehicles with scarce parts, or regions where the cost of repair labour is particularly expensive. More precise pricing helps to avoid cross-subsidies and protects margins
● Strengthen scenario planning and governance – pricing committees should employ stress tests against multiple inflationary scenarios, including prolonged supply chain disruption or sudden spikes in energy costs.
This isn’t simply a compliance exercise, it’s about anticipating change and building resilience into pricing models to ensure that premiums reflect the true cost of risk today, not that of two years ago.
Reviewing your portfolio to restore profitability
Pricing isn’t the only adjustment required. Alongside pricing changes, insurers must make comprehensive reviews of their portfolios to restore overall profitability.
That might include:
● Reprice or withdraw unprofitable segments where claims inflation is too high or competition prevents adequate rate increases
● Update policy wordings to reduce ambiguity, prevent claims leakage and align coverage with current risk realities
● Strengthen supplier relationships, negotiate better rates, improve repair pathways and reduce cycle times
● Invest in claims efficiency, including early intervention triage, digital FNOL and proactive settlement strategies to minimise cost escalation caused by delays.
An industry-critical reset
Claims inflation is now a structural issue, not a temporary disruption. For UK insurers, it’s a wake-up call that signals that strong profitability will depend on faster pricing responsiveness, targeted portfolio management and more efficient claims handling.
Those firms that adapt quickly will be better placed to protect margins and remain competitive in a fast-changing cost environment.
Next time: Inflation and capital adequacy: What boards need to know
If you would like more information about how we can support you in dealing with claims inflation and pricing pressures, contact Brighter Consultancy.
