If you’ve filled up your gas tank or gone grocery shopping lately, you’ve probably noticed a sharp increase in costs. From May 2020 to May 2022, the price of consumer items rose by about 8%. You may have seen increases in costs for:
- Food
- Apparel
- Gasoline
- Electricity
- New vehicles
- Piped natural gas
- Medical care services
Though often considered recession-proof, the insurance industry isn’t inflation-proof. Below, we cover what inflation is, why it’s happening and how it impacts insurance.
What Is Inflation and Why Is It Happening?
Inflation is the rate at which prices of services and goods rise over a certain time. While most of us associate inflation with prices going up, inflation is more accurately defined as a decrease in the value of money, meaning it requires more money to buy the same goods and services. Inflation falls into one of three categories:
- Built-in inflation: If the cost of living increases and employee wages rise as a result, it is known as built-in inflation.
- Cost-push inflation: If it costs more money to produce goods and prices increase, it is known as cost-push inflation.
- Demand-pull inflation: If consumer demand is greater than the supply and prices rise, it is known as demand-pull inflation.
Along with these different types of inflation, the insurance industry can experience social inflation. This type of inflation occurs due to the increasing cost of insurance claims. This increase goes beyond what is attributable to inflation across every sector of the economy.
Though experts don’t completely agree on the exact combination of reasons behind the current high inflation across the world, there are some common threads, including the war in Ukraine, the labor shortage, corporate influence and supply chain disruptions:
- War in Ukraine: Russia’s invasion of Ukraine has led to global uncertainty and inflation. After Russia invaded Ukraine, countries like the U.S. banned the import of oil from Russia. Though this step was intended to deter Russia from continuing the war, the country has continued undeterred and the price of gasoline has reached record highs. Due to the higher cost of oil, other products have become more expensive, as it now costs more to transport items and run manufacturing equipment.
- Labor shortage: There is a labor shortage in the U.S., meaning there are more open jobs than there are unemployed Americans looking for work. Many Americans have left the workforce and chosen not to return for a wide range of reasons. As a result, companies are competing for skilled and unskilled workers and wages have risen to attract workers. This rise in wages could be contributing to the current state of inflation.
- Corporate influence: Despite inflation, supply chain disruptions and labor shortages, some large corporations are boasting their largest profits in years. Some of these corporations are increasing prices to make up for lost revenue due to the COVID-19 pandemic.
- Supply chain disruptions: Factory shutdowns and worker shortages from COVID-19 have led to supply chain disruptions, which are also one of the causes of the current rate of inflation. As a result, many industries have been unable to obtain enough raw materials to keep pace with consumer demand. The microchip shortage, for example, has impacted a wide range of industries and items, such as computers and cars.
What Is the Impact of Inflation?
Inflation impacts different sectors of the economy in unique ways, and the impact on the insurance industry can be significant. During a state of high inflation, insurers may face increased operating costs and costs for claims payouts. Insurance companies may raise their premiums to offset rising costs, but this has a negative impact on consumers who may be forced to reduce or even drop their coverage. Additionally, inflation may reduce the value of the investments an insurer holds, which affects the insurer’s solvency.
Fortunately, Strock Insurance is here to work with insurers like you to help you navigate the changing economy and the impact of inflation. Contact us today to learn more about how we can help.
What Happens to Insurance Rates During Inflation?
Inflation leads to uncertainty. Companies and consumers are unsure how much prices will continue to rise or how these increases will impact their ability to pay for goods and services like insurance. Whether auto insurance, homeowners insurance, life insurance or business insurance, effects on insurance premiums during inflation may include:
- Increased cost of services, goods and claims payouts for insurance companies, which can lead to increased costs for policyholders.
- Less buying power, so payments for premiums may not go as far as they did before inflation.
- More stringent solvency margin requirements that can slow business activity and lead to increased policy lapse rates.
- Increased costs for maintenance and replacement of infrastructure, which impact the premiums charged to policyholders.
Inflation can cause interest rates to rise, which means premiums for adjustable-rate policies could increase. How much inflation affects insurance rates depends on a variety of factors, but insurers and consumers can expect some increase in rates during inflation.
What to Monitor as the U.S. Inflation Rate Rises
As an insurer, you should plan your response to the rising rate of inflation and monitor the following measures:
- Interest rates: As the U.S. Federal Reserve adjusts targets for the federal funds rate, your insurer portfolio may experience changes in rates and returns. Since inflation can lead to wage inflation and higher costs for claims payouts, increases in interest rates may offset some of these costs.
- Wage inflation: Due to the decline in labor market participation, insurers should watch for increasing wage pressure. This involves maintaining expense management transparency and discipline and investing in increased digital self-service and productivity.
- General inflation: The interest rate policy set by the U.S. Federal Reserve depends on how the agency expects inflation to play out. Any sharp increases could lead to concern and aggressive policy intervention. High general inflation can create an environment in the insurance industry that favors assertive pricing strategies, which requires careful management of account pricing.
- Claims cost inflation: Claims cost inflation is another factor to monitor. The factors that influence claims cost inflation are unique across different lines of business. To effectively manage these costs as an insurer, you may want to focus on increasing claims automation, improving managed care network utilization and balancing cycle time improvements.
Contact Us at Strock Insurance
At Strock Insurance, we have been providing competitive rates for insurance to both businesses and individuals in the Central Pennsylvania region since 1983. We have locations in Cumberland, York, Dauphin, Lancaster and Lebanon Counties, and specialize in providing homeowners insurance, auto insurance, life insurance and business insurance. From our convenient locations, we offer outstanding customer service and personalized services for both business and personal insurance needs.
Our team of insurance specialists has served the insurance needs of more than 10,000 customers. Contact us at Strock Insurance to learn more about how inflation may impact you as an insurer or to inquire about the insurance options we offer.