Most of us are already feeling the effects of inflation in the goods we buy, like food and fuel. But how does inflation affect the products and services we buy less often, like home, auto, or business insurance?
We explore how market pressures and inflation affect the insurance industry and what that means when it comes to premiums and claims. We also share practical tips that can help you lower insurance costs without compromising the protection you need.
what market pressures affect insurance?
One of the biggest pressures on the insurance industry is the state of the market itself. Currently, we are in a “hard market” that can occur in periods of uncertainty. During these periods, some insurers find the uncertainty too volatile, causing them to scale back or withdraw services altogether, reducing capacity/competition in the market.
Essentially, this means that there is a lack of interest in new business, risk capacity is reduced and therefore the market drives premiums higher. it stands to reason that as competition decreases and premiums increase, so will renewal terms.
how market pressures affect attitudes towards risk and crime
Are we more willing to take risks with our level of insurance?
Volatile financial and consumer markets also affect the decisions we make, especially as the overall cost of living rises. For those of us looking to save money, not insuring our property, belongings, or business assets can seem like a risk worth taking.
But remember, insurance is a safety net designed to soften the financial blow if the unexpected happens. Committing to coverage, or going without it, simply means that if something goes wrong, you’ll have to bear the costs of reinstatement yourself.
As the price of labor, goods and services has risen recently, so has the risk of being underinsured. Underinsurance is when the sums insured on your policy are not enough to cover the cost of restoring your property or asset. It’s important to make sure you don’t confuse market value with rebuild cost, as they are not the same thing.
crime on the rise
Research also suggests that as inflation drives up the cost of goods, this can lead to an increase in associated crime. Metal and heating oil theft has been in the news recently as criminals take advantage of demand and rising prices.
For businesses, the risk of cybercrime is much higher. Worryingly, 39% of UK businesses detected a cyber attack in 2021/22, according to a government survey. over 30% of businesses said they also experienced cyberattacks at least once a week.
according to ibm’s 2021 data breach cost report, the average total cost of a data breach in the uk was £3.95 million. While most of the cost will be attributed to larger corporations, the implications for a smaller company are still significant. In addition, of the total cost, 38% is attributed to lost business, including the cost of acquiring new clients. however, despite the regularity of cyberattacks and the financial and reputational fallout, less than half of businesses have cyberinsurance.
how does inflation affect insurance?
rising inflation can help fuel a tough market as goods get more expensive and money just doesn’t go as far as it used to. for example:
higher reconstruction costs
If you have buildings insurance, the cost of rebuilding your property (whether residential or commercial) will increase due to the increased cost of materials and the unavailability of labor. the cost of reconstruction should be reflected in the sums insured in your policy.
See also: FDIC: Deposit Insurance At A Glance
The figures show that the price of materials to build a three-bedroom house increased by 14% between January and September 2021. Some industry experts warn that costs could rise further due to the war in Ukraine it disrupts supply chains.
many policies are indexed to automatically reflect changing prices. however, if the sums insured were incorrect at the time the policy was taken out, they will be incorrect for the duration of the policy, regardless of index linkage. therefore, it is vital that policyholders accurately calculate their sum insured based on the reconstruction value plus the cost of associated services (such as debris removal, surveyors, architects, etc.).
It’s equally important to make sure you’re not overinsured, as this will mean you’re paying a higher premium for a level of coverage you don’t need.
This is how much the cost of a claim increases, relative to the increase in the cost of associated materials, goods and services. the same factors that drive inflation also increase the cost of a settled claim. For example, if machine parts and labor costs increase, repairs will cost the insurer more. This will inevitably lead to higher premiums as insurers seek to recoup these losses.
Environmental factors can also cause claims costs to rise. Storms and flooding are on the rise in the UK, exasperated by certain construction methods and lack of investment in UK drainage infrastructure, leading to claims inflation for insurers.
how to reduce insurance premiums?
With all this in mind, it is almost inevitable that the increase in prices is here to stay, at least in the short to medium term. To make sure you don’t compromise insurance, you may be able to keep your premiums low by:
- Paying your policy in a lump sum could save you an installment/credit charge, if applicable;
- precisely calculate the sums insured for the insurance of your buildings to avoid over- or under-insurance of your assets;
- making yourself an attractive risk to insurers, for example by investing in additional security for your vehicle or property, or having a strong cybersecurity plan for your business.
- verify that you are not duplicating insurance, for example your business may have coverage for tax and vat inquiries and disputes through your accountant, but this would also be covered by the legal expenses section of your business insurance.
- using the expertise of an independent insurance broker such as the alan boswell group. fully independent insurance brokers have the experience to truly understand your requirements and assess a wide range of the insurance market to find the most suitable policy to cover your risks and the right product at the right price.
To find out more about how we can help you navigate a difficult insurance market, please contact a member of the team on 01603 218000.