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Library: AXA XL – The case for using cost-plus contracts on property insurance claims

Executive summary:

 The Digital Insurer reviews AXA XL’s Report on The case for using cost-plus contracts on property insurance claims

Costs-plus is the way to go

The cost of renovating and repairing buildings has increased substantially. In light of this, Sherrie Morton, AXA XL’s senior claims specialist for property & construction, advocates for cost-plus contracts instead of the traditional fixed-cost model.

Spiralling prices

Over the past 6-12 months, consumers worldwide have experienced steep price rises on virtually all goods and services.

This entrenched, ongoing inflation wasn’t anticipated. In 2020 and 2021, price increases were prevalent, driven by pandemic-related shutdowns, supply chain disruptions, and, to a lesser extent, government stimulus programmes in some countries. However, these pressures were expected to ease in 2022. In fact, at the beginning of the year, the Organisation for Economic Cooperation and Development (OECD) predicted that inflation above six percent would be extremely rare in any of its 38 member countries, including Australia. Fast forward to June, when the OECD issued a revised update: average inflation among its member nations is expected to be close to nine percent this year, double the previous forecast.

The forces of change

What is driving this new development? The lingering effects of the pandemic, especially the continued shutdowns in China and, more significantly, Russia’s invasion of Ukraine. Russia is one of the world’s top energy and grain producers, and the sanctions against it have supercharged food, fuel and fertiliser prices. The conflict has also cut off Ukraine’s grain exports—about ten percent of the world’s supply—adding even more upward pressure on food prices, whilst raising the spectre of famine in poorer food-importing nations.

Although the war is having less of an impact on Australia compared to many Western European countries, our current economic conditions are still quite severe, especially considering our recent history. According to the OECD, “Consumer prices rose by 5.1 percent year-on-year in the first quarter of 2022, with underlying inflation reaching 3.7 percent. This is the highest level since before the Global Financial Crisis”. The OECD also notes, “While the direct impact of the war in Ukraine on the Australian economy has been limited, both the war and the recent stringent lockdowns in China have exacerbated the country’s supply-chain issues”.

Constructing, renovating or repairing a building: Expect to pay more

Although food and energy supply and pricing get the lion’s share of the media coverage, costs have risen even more sharply for products and services used in constructing, renovating and repairing buildings; starting with the skyrocketing costs of common building materials. Here is a partial list from the Australian Master Builders Association, showing how much building material prices have shot up in the past year:

  • Reinforcing steel: 43%
  • Steel beams: 41%
  • Structural timber: 39%
  • Plywood: 29%
  • Electrical cable: 27%

Two factors are behind these increases. The first is pandemic-related logistical hurdles and bottlenecks which curtailed production. The second is dramatically higher shipping costs stemming from scheduling disruptions and port congestion that, in turn, have led to surcharges and increases in demurrage and detention fees.

However, the story doesn’t end there. Two other factors are adding even more stress to building projects: labour shortages and increased demand.

See the full report for more…

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