At a time when the cost of everything else is on the rise, it is particularly stunning when we see our insurance rates going up also. Our first reaction is “I didn’t have any claims for years…Why are MY rates going up?” Here are a few thoughts on the topic.
Insurance is a Risky Global Enterprise
When you buy insurance, you are putting your money in the bucket and that bucket shares risk with many other folks who also bought insurance. Many insurance companies operate around the world. Insurance is a global risk-sharing mechanism.
In addition to having assets on hand to pay the run-of-the-mill claims, such as homeowners and auto claims, they are required to maintain certain levels of surplus to be sure they can pay claims when catastrophic events occur, such as massive floods, volcano eruptions, uncontrolled wildfire, product defects, pollution, devastating financial events and social unrest such as looting, shooting and destruction. The same insurers that pay your home, auto, life and business claims pay claims resulting from those catastrophic risks at home and abroad.
Their goal is to make a modest profit year over year, but such catastrophic events can erase insurance company surplus built over decades. We are in such a time.
How Does Inflation Impact the Insurance Industry?
Inflation affects insurance companies in a number of ways. First, it increases the cost of doing business, as insurers must pay more for the goods and services they use to operate their businesses.
In addition, inflation can erode the value of investments held by insurers because they invest some of their surplus in the financial market and market swings can have a negative impact.
We all know the cost of goods have increased, so the cost of repairs and replacement have increased the cost of claims. We all prefer “Replacement Cost” coverage, which means higher cost of claims. Our cars have more expensive gadgets and electronics, our homes have more expensive materials and we pay more in payroll these days in our businesses.
The cost of medical care tends to increase faster than the rate of inflation. This is because new treatments and technologies can be expensive, and patients are also living longer thanks to advances in medicine. In addition, the population is aging, which means that there are more people who require insurance coverage.
Impact on Costs for Customers for Insurance Companies
in order to maintain the same level of coverage, insurers must account for rising costs by increasing prices. As a result, customers may find that their premiums go up year after year, even if they have not made any claims.
This increased cost of living, including insurance costs, may force insureds to cut back on coverage or drop it altogether due to the increase in rates.
Conclusion
The past few years have been the most costly for insurers in history. In addition, the insurance industry is not immune to the added cost of inflation. All insurers are feeling the pain. Inflation has an impact on both the top line, in terms of sales, and the bottom line, in terms of payouts. The simple fact is insurers must adjust their premiums to maintain claims-paying stability to its insureds.
Our best advice is to sit tight because all insurers are raising rates for most types of insurance. Jumping from one insurer to chasing a lower rate is fraught with risk and certain coverage may be inadvertently missed or reduced. Your agent’s service and the insurer’s claim paying posture is the most important part of the insurance relationship. We are all best to wait it out and ride the rate rollercoaster for the short-term duration. However, it is a good idea to have a policy review with your agent and see if the higher rates can be offset with discounts or other adjustments. Our team is happy to help. Give us a call today.
