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How Inflation impacts Insurance

Insurance premiums are calculated based on the potential payout vs the attributed risk. So when you review your policy, you will see that each type of coverage has its own associated premium. This provides transparency to the consumer and helps them understand better what coverages are more costly.

When we talk about Auto Insurance, the way inflation affects the cost of the policy is due the rise in what it would cost to replace or repair the vehicle. In July of 2022, used car prices were up 43% from where they were in July of 2020 according to CoPilots Return to normal index. This means if your car was totaled the Insurance company would potentially have to pay out up to 43% more than anticipated to indemnify you. In the insurance industry, the Carriers cannot change the price on the fly, so what happens is they do their best to plan ahead and account for these things. Unfortunately, I don’t think anyone saw inflation of this magnitude coming and now the carriers are caught trying to play catch up. Not to mention, if they pay out higher than expected amounts, they must raise rates to account for the previous years losses. This means higher rates for consumers.

Like the Auto Insurance, Homeowners insurance is also affected, maybe even more so. With auto insurance, the majority of what you pay is for Liability Insurance which is much more insulated from Inflation. However, on a home the majority of your premium goes to the property category of your policy. One of the main materials used in homes is Lumber and with Lumber up 40% since March of 2020, and a sever shortage in Skilled Trades labor, we are seeing a drastic increase in the cost to build a new home. Our agency is seeing an average increase on homeowners renewals in the 15-20% range depending on the carrier in 2022.

Other factors impacting insurance costs are supply chain issues and Increased cost of labor. With parts and materials taking longer to be delivered, we are seeing increases in the duration of Car Rentals and Loss of use claims. Wage increases affect not only the cost to repair vehicles and home repairs, but also the cost of the Admin staff at the Carrier level that do things like Underwrite the policy, Adjusters that inspect at the time of loss, and the support staff that answer the phones when you call in, to name just a few. No one likes to pay more for insurance, but our industry feels the effects of periods of high inflation, just as much as most other industries. One way to curb some of these increases is to re-evaluate your coverages and deductibles. You may also want to contact an Independent agent that has multiple options and can do the shopping for you. Our team here at Customers First Insurance Group, would be happy to assist you in your search. As a matter of fact, we take it upon ourselves to shop the rates at renewal for our clients who experience more than a 10% increase, to say that we have been busy working for our clients is an understatement.

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