How does inflation impact insurance?
The rising cost of inflation affects more than just the price at the pump or the cost of groceries – you may also see affects in your insurance premiums. It’s important to consider the things that go into the price of insurance to make sure you are properly protected.
What is the effect of inflation on insurance premiums?
The cost of insurance is determined by many factors, including the costs to repair vehicles, homes, commercial buildings, farm and agribusiness buildings, farm personal property, equipment. As these costs increase due to factors like inflation, the insurance premium may increase as well.
Other factors impacting increased insurance rates include:
Over the past few years, many areas of the United States have seen increased storm activity resulting in more storm damage. Many of these damaging storms are noted to be out-of-season, meaning more severe storms are happening at unexpected times.
Supply chain and labor challenges
Building materials have increased in cost and are more difficult to obtain. With the current labor shortage, contractors and repair businesses need to pay their workers more, and factor the cost of their hired labor into their bids. In general, it costs more to repair a vehicle, home, building, or piece of machinery today than it did in previous years.
Social inflation factors
Social inflation refers to the rising cost of litigation and insurance claims due to behavioral and socioeconomic trends, such as the legal environment and the normalization of larger settlements over time.
The risk of underinsurance
It is important for policyholders to stay on top of policy limits as inflation rates increase. For example, if your business owns a building, the building is insured up to a certain limit. Having adequate insurance limits is necessary if a loss occurs to rebuild the structure. Since it costs more to build now due to inflation, people can find themselves in underinsured situations if insurance limits have not been reviewed.
While many policies include “inflation guard” to protect against some level of inflation, it may not be enough with the high rates of inflation we are seeing today. Policyholders should talk with their agents to make sure they have the correct building and machinery limits to ensure they are adequately protected in the event of a loss.