-1.1 C
Washington

Insurance Meets Inflation. Will my rates go up?

Share:

Insurance Meets Inflation. Will my rates go up?May of this year marked the highest rate of inflation in four decades. Consumers are feeling the pain at the pump, the grocery, and when shopping for virtually any good or service. But what impact does record-breaking inflation have on the cost of a property and casualty insurance policy? 

To carefully determine an accurate price for policy coverage, insurance companies examine various factors to calculate the total dollars required to effectively hedge those insured against the risk of unexpected financial loss. 

The examination of these factors provides a prediction of 1. Claims frequency—the number of claims within a given period, and 2. Claims Severity—the monetary loss associated with each insurance claim.

Historical fluctuations in Claims Frequency have been impacted by a myriad of shifts in cultural behavior. For a simple example, consider the impact of mass-market texting adoption on the frequency of car accidents (NHTSA reports show that 25% of all auto accidents in the US are caused by texting and driving).  

There is, however, a shorter list of elements that ultimately affect the severity of a claim:

  1. The cost to repair the covered property (materials + skilled labor)
  2. The cost to replace it (availability of materials + skilled labor)
  3. The market value of the insured property

When the cost to repair/replace covered property increases, more premium is required to maintain adequate provisions for loss.

Why is More Premium Required now?

1. Policies Insuring Real Estate:

Due to supply-chain issues, the price of building materials, skilled labor, and home values have skyrocketed over the past year. When a claim is paid based on the cost to repair or rebuild, these rising costs directly increase the dollar amount of each claim payment. Read: How Blanket Insurance Premiums are Calculated.

Consumer Price Index Construction Materials Chart

Data Source: Federal Reserve Bank of St. Louis Economic Resources & Data

 

2. Policies Insuring Automobiles:

a.) Limited new car availability has driven up both new and used car prices. As the cost of cars rises, so does the amount of a claim paid on the amount required to replace a totaled vehicle

b.) Increase in cost of auto repair costs: new car scarcity has forced more people to drive older vehicles for longer, ultimately increasing the overall demand for automotive maintenance. The increased demand coupled with a shortage of mechanics has driven up the cost of automotive labor.

Consumer Price Index: Motor Vehicle Parts and Labor in UC Cities Average graph.

Data Source: Federal Reserve Bank of St. Louis Economic Resources & Data

 

The takeaway: If your collateral protection insurance agent communicates the need for a rate increase, take a moment to understand why rates are rising. Insurers are not trying to profit more by taking advantage of rising prices in unrelated markets. Most companies operate on margins as low as 2-3%. The remaining premium collected is allocated to support staff and to pay claims. The increased costs in the auto and housing industry mean more premium is now required to maintain the same level of coverage quality.

How can you keep costs low? 

Interested in exploring our breakthrough approach? Let’s talk!

Let's talk about Collateral Protection Insurance Options and Alternatives

 

Subscribe to our magazine

━ more like this

Michael Najjar or the Financial Crisis as «Gesamtkunstwerk»

No other artist captures the dimensions of financial markets as compellingly as Michael Najjar in his series high altitude, arguably the first artistic interpretation...

An Open Letter to Mexico’s Small Business Community

By Erez Saf – Pymes Capital and CRiskCo CEO, at Mexico Business NewsDear Small and Medium Business Owners,Securing financing is critical for growth,...

An Insight into Customer behaviour

Introduction: Leveraging Data for Smarter Marketing in a Dynamic Landscape In today’s fast-evolving digital landscape, understanding customer behavior is crucial to driving growth and...

Celebrating Keller Williams’ Top Wins of 2024: A Year of Growth, Innovation, and Culture

It’s been another year of exceptional growth and achievement for Keller Williams. As we reflect on our 2024 milestones, it’s clear that innovation, community,...

The strange psychology of retirement income: Why spending money feels riskier after years of saving

The narrative of a miserly, Scrooge-like figure hoarding his wealth for years instead of enjoying his retirement might seem unbelievable—but unfortunately, it isn’t relegated...