Yes! Inflation affects insurance premiums, along with everything else in our economy.
However, it's important to understand how inflation affects premiums, how long you can expect premiums to remain high, and when premiums might fall. This article will examine the impact of inflation on insurance premiums and provide an approach to insurance when dealing with building, rebuilding after loss, and even paying insurance premiums.
In this blog, we'll cover:
If you’re like many Americans today, you are experiencing “sticker shock” in various ways, including grocery costs, utility increases, and fuel prices. One unlikely connection that most people are unaware of is how increases in inflation are also increasing the price of insurance. This is especially true in the rate of property insurance. Construction costs, including the supply of material and the demand for new construction, factor in with inflation when insurance is estimated for a property.
What is Inflation?
Before getting into the specifics of the property insurance rates, we should first determine what inflation means. According to the Oxford Dictionary, “inflation is a general increase in prices and fall in the purchasing power of money,” (www.languages.oup.com). There are many reasons for inflation to increase but one factor is the shortage of supply, which was widespread during the COVID pandemic and is still an issue within some industries.
Almost everyone has heard of supply shortages in the lumber industry. This affected both personal home buyers and commercial buyers throughout the pandemic and is still affecting project schedules.
As of late 2022, supply problems are less of an issue. Instead, at issue is the rising cost of borrowing.
As of late 2022, core inflation stands at around 8.2%, from 0% in the spring of 2020. That's an amazing rise in just 18 months, but it may be slowing, according to traidingeconomics.com.
Rising inflation rates directly affect the purchasing power of the dollar, even for products that were not available for purchase because of a limited supply.
Insurance Premiums are Rising with Inflation
Insurance premiums are set by a number of factors, such as age, the buyers debt levels, years to repair and property value. Inflation is also a consideration, especially as insurance companies consider the replacement costs of those materials in case of damage.
"Commercial Insurance rates rose 8.1% in 2022, mostly because of rising costs." ~ Source: Business Insurance
According to the Insurance Information Institute, the national average for insurance premiums rose in 2021 at a rate of 4% over 2020, with an average annual premium of $1,398.Unfortunately, the inflation rate at the end of 2021 was at 4.6%, which prompted another 3.7% increase in premiums for the coming year for properties worth less than $1 million, and 6.7% for higher-value homes. (www.thebalance.com)
For 2022, insurance rates rose with inflation at about 8.1% in the second quarter. By the end of the year, they saw inflation rise about 7.1%, less but still on a steady rise compared to other years. Other insurance areas are also seeing increases:
Medicare, Part B, plans are seeing a 14% increase on average for 2022 (AARP).
Commercial rates have risen for the past 18 consecutive quarters. While those increases are starting to slow, analysts are still seeing an 11% to 13% rise. (NU Property Casualty)
Auto insurance has risen 4% to 12% for 2022 (Small Biz Trends).
Why Insurance Rates Rise When Properties Don't Change
The issue with insurance rates rising is with the replacement cost if there is a claim. Even though you may not have changed your property (no upgrades or improvements), the value of your property has gone up because of demand and competition. That means if there is a claim, the cost to replace your property will go up as well.
Higher Land Prices in Wichita, Kansas
In the Wichita, Kansas, area, for instance, land increased 13% in 2021 from 2020 and the value of existing commercial property has gone up in kind. There just isn't enough property to fill demand. Thus, if you need to rebuild after a claim, insurance needs to cover those higher costs.
For property owners who carry insurance, they should recognize that insurance premiums are affected by inflation because of increased prices and how insurance policies have to forecast the cost of labor and materials at the time of a loss.
Higher Prices; Fewer Construction Workers
According to an ABC story from December of 2021, construction prices increased 23.5% from the same time in 2020 for residential structures, and 24.5% in non-residential construction.
Many specific industries were targeted with large increases in cost, mostly due to supply and demand issues, such as iron & steel (+105.1%), natural gas (+150.6%), fabricated structural metal products (+42.9%), and so on. The prices for nearly all construction related products increased from 2020 to 2021. (U.S. Bureau of Labor Statistics)
Beyond construction materials, the available labor force has decreased sharply, partly due to the pandemic and partly due to fewer laborers in the work force overall. During the pandemic, many businesses that support construction were shut down for long periods.
This forced workers to look outside of the construction industry for jobs. That dip in available, qualified labor continues to be a problem across many industries and organizations. There remains a high demand and low supply of workers in the current job market.
Rising Insurance Rates are About the Cost of the Claim
Going back to insurance rates, a lack of labor and lack of materials means insurance companies need to estimate a higher replacement value for insured property. If inflation rates are expected to rise within the period of an insurance policy, then insurance carriers need to include that in their price.
Can You Also Insure Against Inflation?
You may be eligible for inflation protection in your policy. Inflation protection in a policy would mean that your benefits for a claim would be paid based on the inflation rate at the time of the claim. This would protect your buying power and ensure that benefits during the life of a policy don’t erode due to inflation. For some policies, inflation protection would adjust benefits based on inflation at the time of renewal.
Consider Inflation Protection Coverage
You should check with your agent to determine if your insurance carrier offers inflation protection coverage. This type of insurance increases the value of your coverage based on the rate of inflation. This ensures that your coverage doesn't fall behind in value so you don't get caught with too little coverage in the event of a claim.
Getting inflation protection coverage doesn't mean you won't have higher premiums. While you can lock in premiums on this type of coverage, insurers can still increase the premium simply requesting a policy change to state regulators. At the least, it ensures you don't have to monitor your coverage as the economic situation changes.
What will your insurance rates look like?
Many states face much higher premiums related to rising inflation. We looked at the insurance rates for the states we serve and provide a summary below.
Missouri Insurance Rates Should Rise to in 2023
Missouri, like much of the nation, can expect to see increases in insurance rates; however, it depends on your industry and the type of insurance you're trying to get.
Most insurance rates are expected to increase between 5% and 10%, a much lower increase than 2022. Competition is helping to keep increases low.
Several areas are expected to see much higher increases however.
Cyber Insurance May See a 25% to 100% Increase
Missouri businesses looking for cyber insurance may find large rate increases. With the number of businesses offering this type of insurance still low and the requirements becoming increasingly strict because of higher risk, rates could increase from 25% to 100% year over year.
If you're in the market for cyber insurance, it's best to sign onto a policy early as rates will only being going up.
Umbrella Coverage Seeing Large Increases
Expect rate increases for umbrella policies. This is an area directly impacted by inflation, which is causing many companies to pull back on coverage options and limit their risk pools. For this type of insurance, it's possible to see increases of 25% or more.
Contact the Loomis Insurance Agency for Help
As a policy holder, it is each person’s responsibility to understand and educate themselves about how inflation impacts their insurance premiums.
This article mostly covered the effects of inflation on the building and property insurance market, but the auto, healthcare, and even life insurance industries are also affected by rising inflation. Please take a moment to research how this may impact you.
Or, better yet, contact the Loomis Insurance Agency today to discuss any questions you may have. We are happy to be of service!