September 27, 2022

Inflation and What it Means for the Insurance Industry

Currently, inflation is a popular topic of discussion across all industries, including insurance. There are many factors contributing to the rising costs of goods and services such as supply chain issues, labor shortages and changes in technology. Whether it’s checking out at the grocery store or reconstructing a damaged home, the result of inflation is being felt daily. In July, the US Bureau of Labor Statistics reported the Consumer Price Index, a broad measure of everyday goods and services related to the cost of living, soared 9.1% from a year ago. Let’s explore inflation and what it means for the insurance industry.

Inflation and Correct Property Valuations

It’s critical for property owners to conduct periodic valuations on their homes and/or business locations, to ensure they have the total value of the property covered, with inflation and today’s rebuilding costs taken into account. You can contact your agent or local banking institution to help you calculate your property’s correct value prior to renewal. According to the US Bureau Labor statistics, the consumer price index increased 8.3% before seasonal adjustment. The shelter index is one of the largest contributors to the monthly overall index increases, with an increase of 0.7% in August compared to 0.5% in July 2. With inflation on the rise, it’s important to ensure your property will be insured for the correct amount.

Impacted Construction Costs and Project Timelines

A major impact to the catastrophe insurance market is the cost and timelines associated with construction. The cost of materials, supply chain disruptions and labor challenges have each contributed to longer timelines to rebuild a property after a catastrophe occurs. 

While it is standard for the price of materials to fluctuate, there has been a significant hike in the cost of certain building materials over the past two years. Contractors have been experiencing record cost increases for numerous materials since shortly after the pandemic began. Construction bid prices (the prices quoted to complete a project) have also increased significantly but, unlike prior to the pandemic, have not kept pace with recent Producer Price Indexes (PPIs)1. Factoring in higher fuel costs to transport lumber and all other materials, the cost to rebuild a home or business that experienced a total loss has now increased substantially. Additionally, the disruption of the supply chain is making it difficult for projects to be completed within the same timeline they were a few years ago.

Impacts to Jobs

At the start of the pandemic, the manufacturing industry faced a huge setback, losing approximately 1.4 million jobs. Since then, the US Chamber of Commerce has stated it’s been a struggle to hire entry-level and skilled workers, noting: “91% of contractors report high difficulty finding skilled workers, and a record-high 95% are facing at least one product shortage”. Labor shortages may also cause employers to compete by offering higher wages which can end up increasing the cost of a total project.

Business Interruption

With both supply and labor shortages, as well as challenges with knowledge transfer, the time to complete a project has lengthened. Whether you have a commercial or personal risk insured, getting up and running as quickly as possible is essential.

Commercial policies should include business interruption insurance which covers lost income and any operating expenses while the business is down, as long as the loss itself was due to an insured peril.

The Trickle-Down Effect

To adequately cover policyholders, property limits and rates need to be adjusted to take into consideration everything we have discussed, as we mentioned above in the valuation section.  Whether it’s business or personal property, the cost of doing business has gone up substantially over the last few years.

Supply chain issues, labor shortages and the increased cost of materials are only some of the complexities facing all industries today due to inflation today. And because the effects of inflation are so far reaching, we can expect the consequences to continue to impact the insurance industry in the future.

To learn more about inflation, download our coinsurance, inflation and valuation brochure.

1. https://www.agc.org/sites/default/files/users/user21902/Construction%20Inflation%20Alert%20Cover_Apr2022_0.pdf
2. https://www.bls.gov/news.release/cpi.nr0.htm

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