Inflation has been a hot topic over the past three years, impacting everything from groceries to gas—and yes, even insurance. As prices rise across the board, insurance costs are no exception. Why? Because inflation drives up the expenses insurers face, like labour and materials.
For example, imagine your business property is hit by a major storm. The cost of repairs doesn’t just include materials but also the builder’s labour and even their fuel to get to your site—all of which become more expensive during inflationary periods. This means insurers have to pay out more for claims, which can lead to higher premiums for you.
In this post, we’ll dive into the ways inflation directly impacts your insurance premiums and what you can do about it.
What is Inflation?
Inflation is the gradual rise in the overall price levels of goods and services within an economy over time. In simpler terms, it means that the money you have today buys less than it did before. Inflation reduces purchasing power, making everyday essentials like groceries, fuel, or housing more expensive.
Economists typically measure inflation using tools like the Consumer Price Index (CPI), which tracks changes in the prices of a typical “basket” of goods and services bought by households. A rising CPI signals growing demand, while a falling CPI suggests a slowdown in economic activity.
Although the effects of inflation on insurance premiums haven’t been extensively studied, it’s clear that rising costs across industries can significantly impact both premiums and claim payouts. The good news? There are strategies to help manage the impact of inflation on your insurance costs without straining your budget.
Why Are Insurance Premiums Rising?
Inflation doesn’t just affect your everyday spending—it’s also hitting your insurance premiums. Here’s why:
- Increased Costs for Insurers: Inflation drives up the costs for materials, labour, and services, making insurance claims more expensive to settle.
- Impact Across Policy Types: Car, home, and even business insurance premiums have all felt the pinch of rising costs.
- Key Factors Driving Costs:
- Supply chain disruptions
- Rising labour expenses and staff shortages
- Severe weather events increase the frequency and cost of claims
Additionally, the value of your insured assets, like your car or home, may have gone up due to inflation. If you haven’t had them revalued recently, now might be the time to ensure your coverage matches their true worth.
By understanding how inflation influences premiums, you can take proactive steps to protect your coverage and manage costs effectively.
Impact of Inflation on Insurance Claims
Inflation doesn’t just affect the price of everyday goods—it also significantly impacts the insurance industry in several key ways:
1. Claims Become More Expensive
As inflation drives up the costs of materials, labour, and services, the price to settle claims increases as well. This means insurers will likely raise premiums to cover these higher costs, resulting in you paying more for your coverage.
2. Claims Take Longer to Settle
Inflation can slow down the claims process. Since insurers need to purchase more expensive materials and services to repair damages or replace assets, they may delay payouts until these goods and services are available. This can extend the time between when an incident occurs and when your claim is fully resolved.
3. Increased Uncertainty in Settling Claims
During periods of high inflation, insurance companies may be more reluctant to settle claims quickly or at all. With the rising costs of supplies and labour, insurers may hesitate to commit large amounts of money if they fear further inflationary pressures could increase their costs even more shortly.
In short, inflation creates an environment where both insurance premiums and claims settlements become more unpredictable, potentially leading to higher costs and longer wait times for policyholders.
The Impact of Inflation on Your Insurance Premiums
1. Impact on Policyholders: Check for Underinsurance
As inflation drives up the value of assets, one of the biggest risks for policyholders is the possibility of underinsurance due to outdated asset valuations. When inflation rises, the value of property, vehicles, and other assets also increases, meaning the amount of coverage initially chosen may no longer be sufficient.
If your sum insured is less than 80% of the actual value of the property at the time of a claim, the insurer will only cover a proportion of the cost to repair or replace the loss. In effect, you’ll be left to cover the difference out of pocket, making you essentially “self-insured” for the underinsured portion of your assets. To avoid this, it’s crucial to review and adjust your coverage regularly to match current asset values, especially during periods of inflation.
2. Impact on Claims: Rising Costs – Short-Term and Long-Term Effects
Rising inflation significantly affects both the short-term and long-term costs of claims. Insurers need to account for the escalating costs of materials, labour, and services when estimating the value of future claims.
- Short-Tail Claims: These claims are relatively quick to settle and generally involve simpler issues, such as a car insurance claim for a broken windshield. However, even short-tail claims can become more expensive as inflation raises the cost of repairs and parts.
- Long-Tail Claims: These claims take much longer to resolve, sometimes spanning several years, and often involve more complex situations, like injuries from a car accident. Inflation can further complicate these claims as ongoing medical expenses or future rehabilitation costs increase, leading to higher payouts for insurers over time.
Insurers must carefully evaluate these factors when determining risk and setting appropriate reserves to cover claims.
3. Impact on Premiums: As Costs Rise, So Do Premiums
As the cost to settle claims increases due to inflation, insurers are forced to raise premiums to maintain profitability. At Insurance Advisernet, insurance advisors take measures to manage premium increases during periods of inflation. For example, they smooth out price spikes by adjusting excess values and premiums, raising excesses when appropriate to help prevent customers from experiencing sudden premium hikes.
Additionally, policyholders need to understand how frequent claims can impact their premiums. The more often a claim is made, the higher the premiums and excess will be. Insurers view frequent claimants as higher risks, which leads to increased costs for coverage over time.
By staying proactive and ensuring accurate coverage levels, policyholders can better manage the impact of inflation on their insurance premiums and claims.
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