The rising cost of care has been a significant concern for insurers, particularly given the inflationary pressures already impacting the sector. Over the past two years, care costs have surged by 10–11% in 2022 and 7–8% in 2023. Further increases are anticipated, driven by recent government actions and proposals. In particular, the Labour government’s reform agenda, aimed at improving wages and working conditions within the adult social care sector, promises both challenges and opportunities for the insurance industry.
One of the most immediate changes set to impact the care sector is the planned increase in the National Living Wage (NLW). From 1 April 2025, the NLW for workers aged 21 and over will rise to £12.21 per hour. This increase is expected to affect a significant portion of care workers, as approximately one-third of them currently earn wages below this threshold (based upon the most recently released ONS ASHE data for care workers, home carers and senior care workers). Employers in the care sector will be required to adjust their payrolls accordingly, leading to increased operational costs for care providers. These wage increases, in turn, are likely to drive up the overall cost of care, placing continued inflationary pressure on the sector.
In addition to wage hikes, care providers will also face rising employer National Insurance contributions, which are set to increase from 13.8% to 15%. This further intensifies the financial burden on employers of carers, whose cost structures will be directly impacted by these changes.
A key element of the Labour government’s manifesto was a commitment to tackle the crisis in adult social care, with the aim of improving pay and working conditions for those working in this sector in an attempt to improve rates of recruitment and retention of workers providing such care. The Employment Rights Bill currently before Parliament includes provision for the creation of an Adult Social Care Negotiating Body, which will be responsible for negotiating pay, terms, and conditions for workers in the sector. Importantly, these agreements will be enforceable in the same way as minimum wage legislation, with a new Fair Work Agency being tasked with enforcement and ensuring compliance.
These reforms are expected to lead (in effect) to a new minimum wage for care workers, which will likely sit above the level of the National Living Wage.
The underlying objective of these reforms is to tackle the chronic staffing shortages and high turnover rates in the adult social care sector, particularly following the challenges of Brexit, changes to immigration rules for the dependants of health and care workers, and the Covid-19 pandemic. With the vacancy rate for care workers in England standing at 8.3%, more than triple the wider economy’s vacancy rate of 2.7%, the government aims to create a more stable workforce by raising wages and improving working conditions. Research from Skills for Care suggests that better pay can reduce turnover, as workers are less likely to leave jobs that offer more competitive compensation.
The government also hopes that these measures will help attract new workers into the sector, addressing the recruitment challenges that have plagued care providers for years. In doing so, the Labour government envisions a more stable and skilled workforce, which could improve care quality and reduce the disruptions that have been a feature of the sector in recent years.
For insurers, the rise in care wages and the introduction of new employment standards could have significant consequences. On the one hand, these reforms may lead to greater stability in the sector and improve the overall quality of care. A more stable, well-paid workforce may also help to mitigate the risks associated with care providers’ operational challenges, potentially resulting in reduced or slower inflation of care costs.
However, there are also risks to consider. The immediate effect of rising wages and employer contributions will be a sharp increase in care costs, which would likely translate into higher claims costs for insurers. Additionally, the introduction of a nationally negotiated Fair Pay Agreement and the potential for ongoing upward pressure on wages over the next 2–3 years means insurers will need to anticipate higher claims costs in the future. Care-related claims, particularly those involving complex care needs, may become more expensive, with increased labour costs being a significant factor.
Moreover, the increased regulatory oversight and enforcement mechanisms introduced by the Fair Work Agency could lead to a more litigious environment within the care sector. Insurers may find themselves facing a rise in claims related to non-compliance with the new pay and working conditions agreements, which could further drive up costs.
While some immediate changes are already in motion, such as the increase in the National Living Wage set for April 2025, the full impact of the proposed reforms will likely take a few years to materialise. The establishment of the Fair Work Agency and the Adult Social Care Negotiating Body is expected to begin in earnest in 2025, with consultations starting later that year. Insurers should anticipate that these bodies will take 2–3 years to negotiate and implement any initial Fair Pay Agreements, with full regulatory enforcement potentially extending into the latter part of the decade.
The insurance sector must carefully monitor the developments surrounding these reforms. While the intention behind the changes is to create a more stable and well-paid workforce within the care sector, the immediate financial implications may be more challenging. In the medium to long term, however, there is potential for the care sector to stabilise, with better pay potentially reducing turnover and improving care quality.
Insurers should be proactive in preparing for these changes, engaging with the consultation processes where possible, and recalibrating their pricing models to account for rising care costs. The future of care claims in the insurance industry will likely be shaped by the success of these reforms in achieving their goals of workforce stability and higher care quality.
For insurers, the proposed reforms by the Labour government in the care sector present both challenges and opportunities. On one hand, rising wages and the introduction of new employment standards will drive up the cost of care, increasing the financial burden on insurers. On the other hand, if successful, these reforms could lead to a more stable workforce, which might reduce the risk of care disruptions and improve the overall quality of care, benefiting insurers in the long term. Insurers should remain vigilant, prepare for the increased costs associated with these changes, and engage with the policy process to better understand the full impact on care-related claims.
This article has been produced by our Market Affairs team in conjunction with our Care & Rehab SIG, who will be releasing an in-depth paper in the next week analysing the inflation of care claims and the impact of the October Budget.
Should you have any queries in the meantime, please contact:
Jonathan Booth, Care & Rehab SIG Lead
Andrew Williamson, SIG member
David Burn, SIG member
Natalie Larnder, Head of Market Affairs
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