The Effects of Inflation on the Insurance Industry

Effects of Inflation on the Insurance Industry

…And How to Protect Yourself

Inflation has become a hot topic in recent months, and unfortunately, it’s not going away any time soon. While it may be easier to understand the impact when we see prices at the grocery store, inflation influences much more than that. In this blog, we’ll outline three ways inflation has had an effect on the insurance industry, how it specifically impacts commercial property, and tips for minimizing its effects.

Inflation’s effects on the commercial insurance industry

Inflation, or the rate of increase in prices or cost of living over a period of time, often results from a confluence of events. The current rise in prices is not unique; there have been six inflationary periods of 5% or higher since World War II. This most recent bout of inflation is primarily attributed to the pandemic. The commercial insurance industry is now reeling from the effects of the recent spike in inflation, which has resulted in labor shortages, an increase in material prices, and supply chain disruptions.

  1. Labor shortage and increased wages
    Wages and salaries are up 4.5% since December 2020, the fastest increase since the early 1980s. Further, as consumer demand has risen, it’s become harder to find enough qualified workers to meet the demand. Both factors have led to production and building delays that raise the cost of paying out claims and replacing losses.
  2. Material prices
    According to the Insurance Journal, on average, reconstruction costs went up 8.1% between January 2020 and January 2021. Costs for materials rose by 15.2%, with lumber specifically experiencing an 85% increase. Higher material costs also contribute to how much an insurance provider will have to pay out should something happen to a commercial property.
  3. Supply chain disruptions
    The price of materials is rising, but getting those materials has become a problem, as well. Disruptions in the supply chain that began when much of the world shut down during the pandemic have yet to be resolved. These disruptions result in costly delays that drive up prices and, accordingly, increase insurance costs.

Also read: Habitability Claims & Commercial Property

How inflation will impact commercial property owners

The effects of inflation on the insurance industry will inevitably impact commercial property owners. As labor shortages, material costs, and supply chain disruptions increase the costs of repairing and rebuilding commercial property, the cost of insuring the property will also rise. But if a property doesn’t have an accurate valuation to reflect these increased costs, it could result in underinsurance.

To avoid being underinsured, it’s essential to understand the difference between market value and insurance value. What the owner(s) paid for the property or what it might sell for in its current condition is called the market value. But a property’s market value isn’t necessarily equal to the cost of replacing the property in the case of a catastrophic loss. That’s why insurance valuations are crucial, especially in the current climate.

Because of construction industry delays, the gap between market and insurance values is wider than pre-pandemic. The CRC group points out that the longer it takes to rebuild after an event, the more likely business income losses will exceed the policy limit. Fortunately, you can take steps to prevent underinsurance and lessen the impact of inflation.

Also read: Rising Property & Deductible Price Solutions

Protecting yourself in an unpredictable market

Inflation and its effects on the insurance industry may be out of your control, but action can still be taken to minimize the impact. TIG advisors shared some tips in a recent article. The common theme? Proactivity!

  • Have your property evaluated. Many property owners are hesitant to do this, as it may lead to a higher premium. But the consequences of an outdated valuation could be dire – much more costly than higher monthly premiums. 
  • Develop risk mitigation protocols and share those with your insurance provider. Many incidents and claims can be avoided with sound risk management practices. In addition to being good business, it may also lower your insurance premium.
  • Collaborate with your insurance advisor regularly. Have conversations early and often, rather than waiting until it’s time to renew the policy. Your advisor can help you review your coverage terms and conditions and understand the exclusions and policy limits. Conditions can change rapidly, so consider quarterly meetings to make any necessary adjustments.

It may also be worth evaluating your insurance provider. Be sure you’re working with experienced professionals who can accurately assess your property. A good insurance advisor should be able to walk through potential causes of loss and identity coverage gaps. Valuations shouldn’t be based on historical data, but rather on regional conditions and other dynamic factors.

The agents at McGowan Risk Specialists have extensive experience partnering with commercial property owners. Get in touch to learn more about the solutions offered by McGowan’s CAT & Specialty Insurance division.