From gas to groceries, practically everything costs more than it did a year ago. As of June 2022, the annual U.S. inflation rate was 9.1%. This is the largest annual increase since November 1981, according to U.S. Labor Department data published July 13, and many economists believe it hasn’t yet peaked.
While it’s easy to see the impact of inflation on our gas tanks and grocery bills, inflation also affects insurance policies and premiums. As prices for goods and services rise, so does the cost to insure them.
“Inflation absolutely impacts insurance in a number of ways,” says Marty Arnold, senior vice president and chief underwriting officer at Neenah-based Secura Insurance. “The costs of building materials and labor have gone up; the cost of certain liability claims has gone up as medical care costs continue to get more expensive. Figuring out the appropriate price for policies is tricky, but it’s trickier when the environment is changing so quickly.”
Property insurance is most impacted
The property insurance market has been most impacted by inflation, Arnold says, thanks to — you guessed it — supply chain woes and the labor shortage.
“Building materials have gone up incredibly high due to supply chain issues,” he says. “With the labor shortage, most contractors need to pay their workers more and they factor the cost of their hired labor into their bids. It’s costing more to have the same work done now than it would have two years ago.”
Since property insurance products cover replacing properties that have been damaged, the cost of those policies is more expensive because the cost of rebuilding is more expensive. Many insurers are predicting this trend will continue for some time.
“I don’t think the labor crunch will be solved any time soon, even if some supply chain issues [are resolved] and the cost of building materials returns to pre-pandemic levels,” Arnold says.
This is why staying on top of policy limits as inflation creeps toward double digits is so crucial, says Matthew Prickette, commercial sales executive at R&R Insurance Services, Inc. in Neenah.
“When you are talking about simply the asset of a building that a company owns, it’s insured up to simple value and that value needs to be correct if something happens and it needs to be rebuilt,” Prickette says. “The fact is it costs more to build right now, so people can find themselves in underinsured situations.”
Inside a business’s property insurance policy, Prickette explains, is what’s called “business income insurance.” And that is a critical component of a property policy. Business income insurance can help cover lost income when a company’s property is damaged, reimburse existing contracts, pay employees and even pick up the cost of relocating a business to a temporary location while a new one is built.
Many business income insurance policies offer up to 12 months of coverage, but as Prickette explains, rebuilding a property within a year is almost unheard of due to supply chain delays.
“Since the first of the year, I’ve been working with clients on an option of up to 18- or 24-months actual loss sustained,” Prickette says. “Right now, I would do a semi-annual review with your agent and discuss where those costs are.”
There are other strategies to ease some of the increased costs, such as considering a higher-deductible insurance plan and inquiring about discounts. Business owners may be eligible for discounts based on employee hiring and training practices, the condition of equipment, safe driving practices, the use of safety programs and more, Arnold says.
Inflation aside, taking a preventative approach by investing in the maintenance of a property will also have positive long-term benefits on insurance costs.
“A well-maintained workplace has fewer claims, and businesses [with] fewer claims pay less for insurance over time,” Arnold says.
Unit cost, utilization cause health insurance increases
President and CEO of Network Health Coreen Dicus-Johnson says that, when it comes to health insurance, there are two factors that cause increases — unit cost and utilization.
“Utilization isn’t necessarily impacted by inflation … but when we are talking unit costs, absolutely it is,” she says. “The cost of providing health care is getting higher for health care systems whether it’s labor, supply chain, goods, pharmaceuticals — that’s all being impacted in real time.”
Many reports are forecasting a 6 to 6.5% medical cost increase in 2022, yet the rising cost of medical services may not be immediately reflected in insurance policies. Dicus-Johnson says Network Health’s policies and provider contracts are generally issued for one year or more, with unit price increases already locked in for the upcoming year.
“Unlike consumables and consumer goods where you see inflation’s immediate impact, with health insurance there can be somewhat of a lag,” she says. “But we can do the right things now to manage that and hopefully bend that potential increase.”
Jay Scott, a senior regional employee benefits practice group leader at USI Insurance Services in Kimberly, says that for the last three to four years, the average increase of an employer’s medical plan has been in the 5.5 to 6.5% range.
“Inflation is only one component of the health care cost trend,” he says. “It’s not just the rising prices of health care services, it’s also the rising use of those services and the lack of preventative care.”
Prescription, musculoskeletal and cancer claims are the top three areas of spend under most employers’ benefit plans, Scott says. Focusing on strategies that address those areas would behoove employers looking to stretch their health care budgets. For example, one way to reduce prescription spend would be implementing services to help eligible employees take advantage of manufacturer assistance programs that offer free medications.
If mitigating the effects of inflation is the best employers can hope for, Dicus-Johnson is betting on preventative care to do that. “There have been lots of cost initiatives we’ve put in place with members over the years focusing on prevention, and we are starting to see the benefit,” she says.
Preventative care can help lower medical costs by identifying conditions before they require costly emergency interventions and even prevent them from developing in the first place.
“We are in uncharted territory because of the pandemic, so combined with actual real-time inflation because of labor issues and supply chain, I don’t know what [future increases are] going to look like,” Dicus-Johnson says. “A lot of people feel they don’t have control over inflation, which is probably true, but what we do have control over is managing our health and making good decisions about preventative care.”
Social inflation factors
Inflation tells a complicated story, some of which isn’t represented in the Consumer Price Index. Prickette says “social inflation” is important for policyholders to understand because it affects how much they pay for liability coverage.
Social inflation is hard to measure — it refers to the rising costs of litigation and insurance claims due to behavioral and socioeconomic trends. This includes factors like the current legal environment, public perception of “big business” and the normalization of large settlements over time.
The volume and severity of jury verdicts continue to grow. According to loss data from Advisen, between 2015 and 2020 the median cost of a jury award over $10 million increased by 35% — from $20 million to $27 million.
For this reason, Arnold says liability limits are important to scrutinize as well.
“Some businesses have been asking their agents to review how much umbrella limit they’re buying. Many businesses are buying more limits because of the trends in jury verdicts,” he says. “As jury verdict awards get larger, businesses need to buy more liability coverage as well.”
According to the experts, the best strategy for managing the effects of both economic inflation and social inflation is prevention and adequate protection.
“Our advice for business owners is to be real proactive and talk to their agent in advance of a policy renewal to make sure they have enough coverage for the upcoming year,” Arnold says. “They can make an adjustment in the middle of a policy term. They don’t have to wait until next year’s policy is about to start.”
