Along with death and taxes, another phenomenon we can expect with near certainty over time is inflation. Inflation can create a severe challenge in the commercial insurance market, affecting both insurers and their policyholders. It’s crucial for policyholders and carriers to have a clear understanding of inflation and take the following steps to ensure adequate coverage during these difficult market conditions to avoid suffering the pitfalls of inflation affecting every other sector of the economy.
The Commercial Insurance Market Impact
In the commercial insurance market, several difficulties can arise from increasing inflation concerns. It must be stated, in contrast to prior eras of extended inflation because of immense investment gains, the insurance industry is in a better position to weather losses to reserves. In addition, financial reporting processes have advanced to give insurers added capacities to diagnose and counter loss trends. However, the ambiguity surrounding current inflation and how long it will last could end up threatening the insurance industry’s reserve levels’ long-term stability and the profitability of underwriting.
With regards to specific lines of coverage, here is how two markets are at risk of being impacted by rising inflation:
Commercial property – In the property insurance space, the construction industry’s worker shortage has led to higher labor costs, causing the cost to repair or rebuild structures following a loss to soar. Concurrently, the price of various crucial building materials has skyrocketed due to related supply chain issues. Specifically, during the pandemic, the costs of steel and lumber have more than doubled, according to the National Association of Home Builders. In the middle of increased property loss costs, poor underwriting results may be experienced by insurers, encouraging them to introduce added restrictions to coverage and increase policyholders’ premium expenses. Policyholders may also come face-to-face with possible underinsurance concerns after larger property losses with elevated repair and rebuilding costs increasing overall claim severity.
Commercial auto – Vehicle repair expenses and the resulting claim costs have swelled in the auto insurance market. Increased labor costs and disruptions in the supply chain for several crucial vehicle parts, along with entire vehicles themselves, due to worker shortages in the auto industry are responsible for this wave of higher costs and prices. Highlighted by rising crash rates and increased expenses in medical treatment[1], the frequency and severity of accidents have surged in recent years, compounding claim costs. Like the property insurance market, a drop in underwriting profits for auto insurers could be a natural outcome of the elevated amount of loss costs. Higher loss costs may drive auto insurers to hike premium expenses while restricting coverage offerings to their policyholders, especially when the market, for the last decade, has been largely unprofitable[2].
Currently, the property and auto insurance markets are taking the brunt of prolonged inflation, but it will begin to affect additional segments – such as the workers’ compensation and liability insurance spaces – over time. This means insurers would have to confront the looming difficulties in sustaining insurance pricing to stay level with more erratic loss trends.
Insurers may need to stay the course in raising overall premium expenses and making other adjustments to coverage to avert elevated loss ratios from concerns related to rising inflation.
What can you do for your insureds?
It’s important for agencies to anticipate the needs of their policyholders to do what they can to minimize the complications of underinsurance concerns, heightened premium costs, and coverage restrictions from ongoing inflation issues. Agencies can take these steps to protect policyholders:
The earlier the policy renewal conversation, the better. As the policyholder’s trusted insurance professional, discuss the renewal process for coverage well in advance especially during these challenging market conditions. Doing this will let insureds stay accurately updated on the current inflation trends and give them plenty of time to brace for possible policy changes – especially as it applies to pricing – before renewal. Policyholders and their insurance professionals may want to schedule quarterly meetings to be sure coverage will be able to be adjusted as needed in this evolving landscape.
Go over coverage terms and conditions. Initiate the conversation to provide assistance in reviewing the terms and conditions of their coverage, paying close attention to any exclusions. Also, to determine if they will be properly covered following a loss, evaluate any applicable policy limits and sub-limits. If any underinsurance issues are identified, policyholders may want to consider purchasing policy endorsements as they update their coverage to maintain adequate protection.
Amend property valuations. When it comes to commercial property insurance, make your insureds aware their coverage properly reflects accurate property valuations. Confirm the valuations used in their policies would be able to meet the current expenses for recovery after a loss, especially with costs associated with property repair and rebuilding on the rise. If not, policyholders will be left underinsured if the cost of repairing/rebuilding their properties go beyond their existing coverage limits because of outmoded valuations.
Establish sufficient risk management practices. Finally, to prevent potential claims, let the policyholders know whether or not they have effective risk management measures in place. Be sure to inform your policyholders may even be eligible for discounts on their premiums by logging these measures.
Through a variety of different factors, the cost of insurance can be affected by inflation. Both carriers and policyholders are well served by staying ahead of the inflation trend to ensure a properly priced product with adequate coverage.
[1] USDOT Releases New Data Showing That Road Fatalities Spiked in First Half of 2021
[2] Commercial Auto: Profitability Issues Remain, but There's Light at the End of Tunnel
