The Impact of Inflation on Insurance
By Sue C. Quimby, CPCU, AU, CIC, CPIW, DAE – Vice President/Media Editor
Inflation is a major headline in the news, affectting all aspects of life. According to bls.gov, in the 12 months ending June 2022, the Consumer Price Index increased 9.1% – the largest jump in 40 years. Inflation impacts our daily expenses as well as our ability to pay for future bills. When prices of goods and services increase, it directly alters insurance. Helping clients understand the possible influences inflation has on insurance is another value-added service of the professional insurance agent.
Like any other industry, insurance companies are affected by economic changes. For example, increased costs for materials and labor directly impact companies when they repair or rebuild damaged property. Companies must adapt, usually by raising premiums. According to swissre.com, rising claims costs represent the primary impact of inflation on the insurance industry. Insurers may respond by increasing premiums. On the investment side, rising interest rates and investment returns may help counteract the rising costs of doing business.
While an annual review of coverages is always a good idea, it is essential in times of surging consumer prices. Construction costs to repair or replace buildings are also going up. Property insurance policies for both residences and businesses contain insurance to value clauses. When costs to rebuild or replace the property increase, and policy limits remain static, existing coverage limits may not be adequate. In addition, failure to maintain the proper amount of insurance may subject the policyholder to a coinsurance or underinsurance penalty. It is important to remember that adequacy of coverage is determined at the time of loss, and not the inception of the policy.
Many insurance companies include an inflation guard or cost of living provision in their policies. This means coverage limits increase a set percentage at each renewal. Some even raise the coverage limits gradually throughout the policy period. Applicable policies that may offer inflation protection riders include homeowners, dwelling, business, automobile, life and long term care coverage. However, historically these percentages have been small, and the additional coverage may not be enough to match the actual increase in replacement and/or repair costs. Inflation protection may also be provided for automobile insurance policies to help address the higher costs of vehicles due to inflation and supply chain issues such as microchip shortages.
Guaranteed replacement is another option that may come in handy for the policyholder. The provision guarantees that the property will be rebuilt/replaced to put the policyholder in the same condition they were prior to the loss. There is no set dollar amount. This differs from traditional replacement cost coverage, which will repair/replace the property but only up to the policy limits.
Another impact of inflation on insurers is increase in hazard. When money is tight, policyholders may forgo routine maintenance and upkeep, leading to damage and possible foreclosure. Some may be tempted to stage claims in the hopes of a monetary benefit.
Life insurance is also impacted by inflation. In most cases, unless there is an inflation or cost of living increase rider as mentioned above, life insurance limits do not automatically adjust to reflect increasing prices. Term and whole life policies often maintain premium and benefit levels regardless of the economy. Others, such as variable or universal life policies, may fluctuate depending on inflation. Dividends may also vary depending on the economy. For those who are struggling to make ends meet, life insurance may not be seen as an essential expense. Coverage is sometimes dropped during tough economic times. While life insurance may not be considered a necessity, a tight budget may underscore the importance of the policyholder’s income, and therefore the life insurance policy, to the family.
An inflation rider is recommended when buying life insurance, especially if proceeds are intended to pay for funeral expenses. Inflation protection is essential when purchasing a long term care policy. Historically, costs for long term care have risen. In 2021 the industry saw double digit increases, according to cnbc.com. There are usually several options for inflation protection in these policies. For example, a long term rider can increase not only the daily benefit but also the lifetime maximum benefit. Preferably the annual increases will be automatic and not based on providing continuing evidence of insurability.
During times of inflation, higher costs of goods and services may have unexpected consequences. Insurance is one area that needs to be considered. Helping clients understand the impact of inflation on insurance is another sign of the true insurance professional.
