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As everyone in the property insurance industry knows, Escape of Water (EOW) claims are a large and growing issue. 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 EOW claims costs. This paper looks at the facts and analyses our data to understand the drivers behind increases in EOW claim values. We break down EOW claims costs to see where the expenditure is going and provide answers to the reasons for these cost increases.
We also look at the source and severity of EOW to understand what is driving the claims in the first place, and we 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 EOW claims.
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 EOW 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 Assist over 70% of the claims that we manage are EOW 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.
The average value of claims has increased due to other factors that are often over looked.
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 EOW 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.
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 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 Assist 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.
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 EOW claims involve asbestos removal where the asbestos testing and removal is done by a separate company appointed by the insurance client.
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 EOW claim has increased from 2.25 in 2012 to 3.05 in 2018, a 36% increase. This suggests that the severity and extent of EOW claims has been increasing.
The data on the types of room affected is surprising. Hall, stairs and landing consistently feature in more EOW claims than other room classifications, suggesting that the hall, stairs and landing are the most likely areas to be affected by an EOW (as they are normally adjacent to bathrooms and kitchens). Over the last seven years we have seen a steady fall in the percentage of EOW claims that affect the kitchen –17.05% of EOW claims affected the kitchen in 2018 compared to 21.79% in 2012.
Over the last seven years we have seen a steady increase in the percentage of EOW claims that affect other rooms such as airing cupboards, conservatories, lofts, utility rooms etc. In 2018 21.02% of EOW claims affected other rooms, compared to just 13.28% in 2012. This reflects the changing room structure of homes as more people have utility rooms, put washing machines in their garages or have boilers and water tanks in their lofts.
The percentage of EOW claims for other rooms has remained relatively stable over the seven years.
Average cost per room
Most of the increase in indemnity spend arises in kitchens (53% from 2012 to 2018) and bathrooms (49% from 2012 to 2018). The cost for all other rooms has increased in line with inflation.
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.
Partly this is due to more expensive flooring such as solid wood floors and ceramic tiles, but our experience tells us that it is also down to the way insurers handle claims in relation to 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 EOW 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.
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.
Contributions towards matching items are made in 9% of EOW claims. However, in cases where a contribution is made the costs of the matching items represent 30% of the overall cost of the claim. These claims have higher than average claim costs and the average contribution across these claims by the insurer was £1,763.
45% of matching item contributions arise in the bathroom (mainly tiling) and 35% of matching item contributions arise in the kitchen (units and tiling). Overall, 40% of matching items are for tiling and 20% are for kitchen units. Another 15% of contributions are made towar
ds flooring finishes.
These results correlate with the largest increases in costs that we have been seen over the entire claims portfolio.
Source of leaks by room
Over the last 6 years most leaks (50%) have started in the bathroom and 20% started in the kitchen. 7% of EOW claims start in the loft and around 3% start in the lounge/living room and 3% start in the airing cupboard.
Severity of leaks by room
Interestingly, the claims costs tend to be reasonably modest for bathrooms – other rooms are more likely to see higher claim costs.
The table above shows the relative severity, and hence indemnity cost, of leaks originating in the different rooms of a house. Bathrooms are the benchmark at 100.
The most severe claims start in the living room, but the frequency is very low at just 0.26%. Typically EOW claims in the lounge are due to leaks from central heating systems that can go undetected for a while and can cause severe damage to flooring and contents. Reinstatement works in living rooms and lounges tend to cause more collateral damage as well, so the reinstatement costs increase.
Only 0.13% of leaks come from cloakrooms but as these usually involve contaminated water the severity is 40% higher than a general bathroom leak.
Kitchen leaks create more severe and costly claims than bathroom leaks – 11% more. As 20% of EOW leaks come from kitchens we have investigated the source and severity of these claims in more detail below.
Lofts are creating increasingly severe EOW claims as more boilers and hot water tanks are being located in the loft. 7% of all EOW claims originate in the loft and cause extensive damage to the floors below. This suggests that underwriting questions should be directed towards understanding where boilers and hot water tanks are held in the home.
Overall bathrooms and kitchens are clearly the main source of EOW claim indemnity spend due to their frequency and severity. So we have looked at these rooms in more detail and our findings are set out below.
28% of leaks in the bathroom come from pipes and another 21% come from showers. These findings support the view that modern plumbing fittings are the cause of many EOW claims. The WC accounts for 16% and the bath 13%. Sinks cause 8% of bathroom claims and seals another 7%.
The table above shows the relative severity, and hence indemnity cost, of leaks originating in the bathroom. Pipes are the benchmark at 100.
The most severe leaks are caused by underfloor heating and hot water cylinders but their frequency is low at 0.77% and 0.26% respectively.
Leaks from the WC are 25% more severe than leaks from pipes, and as they account for 16% of EOW claims in the bathroom they have a significant impact on indemnity spend.
21% 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.
Pipes and WCs 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 is high due to the nature of the leak – contaminated water will always create a much larger claim cost as the clean-up costs can be significant.
Pipes are the main source of leaks in the kitchen as well as the bathroom. 45% of leaks in the kitchen are caused by pipes and another 18% is caused by washing machines. The dishwasher accounts for another 13% and the sink 11%. These figures clearly highlight how modern appliances have contributed to the increase in EOW claims in the home.
The table above shows the relative severity, and hence indemnity cost, of leaks originating in the kitchen. Pipes are the benchmark at 100.
Fridge freezers cause the most severe leaks, being three times the severity of a leak from a pipe. This is closely followed by boilers and dryers. The frequency of these sources are low at 0.64% for each one.
Leaks from fridge freezers and boilers tend to be severe as they often happen whilst the home owner is away, so the damage builds up. For fridges, dishwashers and washing machines the damage is less severe as the leak is usually detected quickly.
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 leaking in the kitchen is more severe than water leaking in the bathroom. There are far more hidden pipes in a kitchen and accessing the pipes is more difficult when there are fitted kitchen units, tiling on the floors and walls and appliances.
We work for many different clients who all have a different approach to managing supply chains and pricing scopes of works. Some use their own in-house schedules of rates, while others use the MA Assist independent National Schedule of Rates (NSR). Some have surveyor-led models with pre-scoped claims, while others use a loss adjuster led model or instruct MA Assist directly. Where an insurer instructs MA Assist directly and uses the NSR, we refer to this as the “MA Assist model”. So our data comprehensively covers many different types of commercial model.
In previous opinion pieces we have talked about the impact of different models and schedules of rates and how they affect claim outcomes and values. You can read them on our website:
Our clients can be divided into three broad categories and we have anonymised the data accordingly. “S” clients use the pre-scoped surveyor-led model with a schedule of rates set by the insurer. “L” clients use a loss adjuster led model with a schedule of rates set by the insurer. “NSR” clients use the MA Assist model (NSR rates and instruct MA Assist directly).
Note that we have used consistent data and have excluded large loss claims that would always be managed by a loss adjuster.
Average claim values
The table below shows the relative average claims value for each client in relation to the overall average EOW claim value. The overall average is the benchmark at 100. Those clients who use the NSR have average claim values that are at or below the average claim value. The loss adjuster led claims have higher than average claim values.
This data suggests that surveyor led models and the MA Assist model create the best EOW indemnity spend outcomes. This is almost certainly due to the strong validation processes carried out by surveyors and MA Assist. The surveyor led claims have cost outcomes that are similar to the NSR based claims, but the claim outcomes and customer experience are quite different.
The table below shows the relative average variations per claim for each client in relation to the overall average variations per claim. The overall average is the benchmark at 100. Those clients who use the NSR and instruct MA Assist directly consistently see fewer variations per claim than other clients. The loss adjuster led claims consistently see more variations per claim than the other claims.
One of the reasons for the NSR claims having fewer variations is how the rates have been designed. The NSR was developed by an independent body of experts (National Schedule of Rates Management) specifically for the type of work that our contractors do on insurance reinstatement works. The NSR is a useable and clearly defined schedule of rates that:
The NSR provides clarity to all parties in understanding what is and is not included within the schedule of rates. It also provides best practice on how to scope insurance claims and what information is required to validate an insurance claim. As a result, contractors can quickly and accurately prepare a comprehensive scope of works that covers all of the predictable costs on a claim.
The NSR ensures that the scheduled line items account for 80% of spend (volume and value) so there is no need for high levels of provisional sums and later variations. The rates are fair and straightforward.
One other point to consider is that it is in a contractor’s best interests to get a full scope prepared accurately the first time. A contractor wants to get approval in full for all the works he needs to do so he can go on site and get the job done quickly and profitably, first time. Waiting for variations creates delays in a claim and presents costly operational issues for contractors.
Pre-scoped claims almost always involve variations as the contractor identifies missing costs during the pre-start visit. When a loss adjuster is involved there are even more variations.
So although the surveyor led models and MA Assist’s model create similar cost outcomes for EOW claims, MA Assist’s model gets there quicker through fewer variations and, as we have demonstrated in previous opinion pieces, creates better claim outcomes for the customer.
The NSR claims perform well when the provisional sums are considered. The table below shows the average percentage of claim costs that are provisional sums (blue) versus scheduled line items (orange).
Those claims that use MA Assist’s NSR have far fewer provisional sums in the scopes of works – less than 20%. This is as expected as the NSR has been designed specifically for the types of work our contractors carry out. All other schedules of rates have, on average, around 30% provisional sums in the scopes. This clearly creates an issue for insurers’ reserving as such high levels of cost estimation make reserve calculations variable until the final costs come in when the claim is closed.
There is a clear link between the number of line items in a schedule of rates and the level of provisional sums used. If a schedule of rates is long and complicated a surveyor finds is much more difficult to find all of the right scheduled line items that he needs to build up his scope and so is more likely to resort to provisional sums.
There is also a clear correlation between claim values, number of variations and percentage of provisional sums – the higher the provisional sums, the higher the claim value and the more variations there are. The loss adjuster led models perform poorly on this measure as well as the others detailed above.
So not only does the MA Assist NSR model create accurate scopes of works with fewer variations, it also reduces the use of provisional sums which creates more certainty for claims handlers in their reserving and CoR forecasts.
We have looked at the provisional sums for the different models in more detail and tried to compare them. Detailed comparisons are difficult due to the different structures used for each schedule of rates, but there are some clear trends.
For the loss adjuster led models provisional sums are incurred across all trades and line item categories. Only around 37% of provisional sums relate to floor and wall finishes and kitchens. Scaffolding, protection, welfare and debris removal account for another 26% with the remainder spread across other categories such as brickwork, electrics and decoration.
By comparison, floor and wall finishes and kitchens account for around 80% of provisional sums under the MA model using the NSR. This is because the NSR has been designed specifically for the type of work MA Assist contractors do, so there is little need for provisional sums other than flooring, tiling and kitchen units.
The surveyor led models have around 68% of provisional sums relating to floor and wall finishes and kitchens, leaving around one third of provisional sums spread across other trades and categories, such as electrics, decorating and roofing.
All of the above factors have a significant impact on EOW claim durations. We have looked at the trends for claim durations for the various models over the last 3 years, and it is clear that those models that involve higher numbers of variations and provisional sums result in longer claim durations.
The graph above looks at relative claim durations for the different models over the last 3 years. NSR claims consistently have much shorter claim durations.
As everyone in the industry knows, the longer a claim remains open the higher the administrative costs are. Such costs are not easy to measure, but it is clearly in the interests of the insurer, claim handler and customer that an EOW claim is opened and closed as quickly as possible. Those clients that instruct MA Assist directly and use the NSR rates are experiencing claim durations that are consistently over 20% shorter than the average.
We have also looked at customer satisfaction for EOW claims across these different models. We collect NPS data for all of our clients and, as can be seen from the graph below, NPS scores are much higher with the MA Assist model.
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:
It is clear from our data that the main cause of leaks in both rooms is pipes because for both frequency and severity pipes rank high in our data. Pipes and WCs are the largest cause of indemnity spend on bathroom EOW claims and in the kitchen it is pipes and washing machines.
Agreeing to contributions for matching items such as tiles and kitchen units is making a significant contribution towards the rising EOW indemnity spends. Insurers need to decide whether to apply the terms of their policies or accept that EOW claim costs will continue to rise in order to keep customers happy.
Our data clearly demonstrates that different commercial models create different cost profiles and outcomes for EOW claims.
Insurers concerned about EOW claim costs should use the surveyor led or MA Assist NSR models. However, if an insurer is also concerned about the customer journey and ensuring that EOW claims are scoped correctly with fewer variations and delays to the claim, then insurers should be instructing MA Assist directly and using the MA Assist NSR.
Loss adjuster led models create higher claim costs, higher variations and uncertainty over final costs through the high use of provisional sums. Similarly where specialist drying companies are used this can add cost and elongate the claims lifecycle more than it would be through a streamlined approach.
This series has identified areas where insurers can make changes to bring their increasing EOW claim indemnity spend under control. In summary:
Indemnity cost control is achieved through expert validation in the surveyor led and MA Assist models, but to minimise the overall cost and duration of EOW claims and to improve customer satisfaction, insurers should consider using the direct MA Assist model where customers want a fulfilment solution.