Cash settlements have always been an option when it comes to closing claims. A cash settlement might even be the best option, in some circumstances. However, over the last 12+ months we’ve seen a marked increase in the number of cash settlements that are offered, and the pressure felt by policyholders to accept them.
Whilst there’s an ongoing review of the way insurance policies are sold to homeowners - currently being conducted by consumer rights champion, Which? - we’d like to take this opportunity to shed some light on the shift towards lump sum settlements and the impact it’s having on policyholders, brokers, and contractors alike.
More claims, more pressure
According to the latest data published by the Association of British Insurers (ABI), a whopping £6.1 billion was paid out in UK property claims last year; the highest annual total on record, and up to 50% higher than totals reported between 2021 and 2023. In the final quarter alone, payouts reached £1.5 billion, as adverse weather conditions continued to drive up claims costs.
At the same time, recent investigations show that acceptance rates for home insurance claims remain relatively stable; many insurers boast a payout rate between 70% and 90%, whilst some insurers, such as Admiral, pay out on only half of the claims they receive.
With claim acceptance rates basically unchanged, these figures shine a light on big-picture shifts across the insurance industry, namely that:
a) Insurers are receiving a higher volume of claims on home insurance policies, and;
b) The value of each claim is climbing
The increased cost of materials and a widespread lack of skilled labour are just two of the key factors contributing to rising claims values. But it is the combination of more claims being made, higher costs to rectify damage, and tighter insurer acceptance rates that’s creating increased pressure across the system, and is likely a key driver influencing the higher rate of cash settlements being offered. With a cash settlement, insurers can get claims closed quickly, and likely save themselves some money in the process.
A shift in approach?
So, we have an idea as to why we’re seeing an increase in the number of cash settlements being offered, but what’s the reasoning behind the number that are accepted by policyholders? As we know, cash settlements are rarely the best-case scenario for most, so why are we seeing more policyholders sign on the dotted line to receive their lump sum?
Professionals across the sector have pointed out that it’s likely due to the way cash settlements are being introduced. Rather than being presented as one of several balanced options, they’re increasingly positioned as a quicker or more convenient route to resolution, and often at an early stage in the claim.
And it’s not something that’s gone completely unaddressed. The Financial Conduct Authority has noted that some insurers aren’t doing enough to ensure that cash settlements consistently deliver good outcomes for their customers, especially for vulnerable policyholders who may not have a thorough understanding of what they were agreeing to when they accepted.
Additionally, it has become common practice for insurers to ask their policyholders to gather multiple quotes for repairs, which are then used to inform the settlement figure. On the surface, this might seem like a practical and reasonable practice, however the reality of how this process works is quite complex, and far less fair than it may first appear…
The hidden cost of getting three quotes
Requesting multiple quotes is usually seen as a fair way to establish pricing. However, in the context of home insurance repairs, it’s not so straightforward; mainly because preparing a compliant insurance repair quote is not a quick exercise. Each time a contractor is called upon to put together a quote for a home insurance claim, it usually involves:
- Visiting the client’s property and completing a thorough damage assessment
- Compiling a detailed scope of work
- Providing a detailed breakdown of costs, aligned with insurer expectations
- Thoroughly documenting all damage to support approval of the claim
- Liaising with the insurer should any aspect of the scope or quote be queried
This work takes a lot of time, expertise, and resource, and there’s absolutely no guarantee the job will come in at the end of it all.
The key takeaway here is that, when several contractors are asked to quote for the same project, but only one (or even none) proceeds, the majority of that effort and cost is absorbed by the contractor themselves. And when we consider how much strain most contractors are already under, this loss is quite significant.
A sector under pressure
It’s no secret that the construction industry is currently facing a number of challenges, and has been for several years now. Broadly speaking, these span three key areas:
- A shortage of skilled trades
- Rising labour and material costs
- Increasing regulatory and compliance requirements
So not only is it trickier to find someone who’s capable of completing the work, but it’s also becoming more of a challenge to find contractors who are willing to quote for the work. As we’ve seen, putting a quote together for home insurance repairs is no mean feat, and it’s highly likely that either the job will go to a contractor already within the insurer’s network (who’s willing to accept lower rates of pay), or if the work is awarded outside, contractors know to expect a back-and-forth with the insurer before the cost is signed off and the work can start. Additionally, with changes in regulations, contractors are having to fork out a lot more each month/year simply to stay compliant.
These pressures aren’t theoretical; they’re already impacting how contractors operate and the type of work they’re willing to take on, which can cause a real headache for the policyholder when they’re asked to gather multiple repairs quotes.
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Cash settlements: impact on policyholders
A cash settlement might initially appear as the easiest option, giving the policyholder a quick resolution to their claim, and greater control over how their repairs are carried out. But what a lot of people don’t realise is that the end figure is most often based on reduced or benchmarked pricing, and won’t necessarily cover like-for-like replacements in their property reinstatement.
Overall, cash settlements pose three main risks:
- The settlement doesn’t reflect the true cost of completing the work
- There are unforeseen works that haven’t been allowed for in the cash settlement
- The quality or scope of repairs may need to be compromised
In some cases, policyholders may find themselves contributing additional funds to make up for the lack, or struggling to progress repairs at all. This can be particularly disappointing when the policyholder has been reassured early in the claims process that their settlement will be sufficient (likely as a tactic to encourage them to settle quickly).
Why are contractors so expensive, anyway?
Amidst these challenges is another key one: the common belief that contractors are simply too expensive. And without knowing the ins and outs of what makes up a quote, it’s easy to see why some people raise their eyebrows when they first see a figure for their repairs.
In reality, insurance repair pricing reflects far more than the visible elements of labour and materials, because the responsibilities of the principal contractor extend far beyond simply fixing the property. Rather, insurance repair pricing has to incorporate the full responsibility of delivering a compliant, safe, and professionally managed repair, which includes
adhering to building regulations, meeting health and safety obligations, maintaining appropriate insurance cover, and managing both the coordination and sequencing of works. Not to mention, skilled trades are in high demand, and are upping their prices as a result.
On top of all this, there’s a common challenge that crops up when hammering out the pricing details: the insurer’s lack of understanding over how construction jobs usually operate. For example, an insurer may query labour costs on a job they’ve estimated will only require half a day’s work, without accounting for all the practicalities of travel time, site set-up, material handling, and the work involved with coordinating multiple trades. These are all essential parts of the process, yet they’re not always visible or even considered at the point where costs are being assessed by insurers, nor is the potential unseen cost of downed tools while waiting on approval for variations.
Where do we go from here?
It’s important to recognise that insurers are operating within their own commercial and regulatory constraints, and that managing claims costs effectively is a key part of their role. However, it’s already been highlighted that a lack of clarity around the real impact of cash settlements can lead to outcomes that don’t always serve the policyholder’s best interests. So, what can we do about it?
As the market continues to evolve, there’s a growing need to make sure that cost control isn’t the sole factor influencing the way claims are resolved. Fair outcomes for policyholders, sustainable working conditions for contractors, and realistic expectations around how repairs are delivered in practice are all equally key.
For brokers, loss assessors, and other professionals supporting policyholders, having a clear understanding of these dynamics can be invaluable. When clients are presented with a cash settlement, it’s not always obvious what that figure represents or how it has been determined. Where this is the case, education is key; helping the policyholder understand the basis of the settlement, how repair costs are constructed, and what they can expect should they choose to manage the repairs work themselves can have a big impact in their decision-making at a vital stage of their claim, and ultimately affect their repairs experience.
Final thoughts
The bottom line is: cash settlements will always have a place in the way insurance claims are handled. And it’s true that, when used properly, they can offer a level of flexibility that might benefit some policyholders, but they should by no means be the go-to option for claims resolution. Because in the end, it’s not a pay-out that closes a claim - it’s quality reinstatement work that sees the property put right.
