What does inflation mean for insurance?
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, car, 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 on 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’re in a ‘hard market’ which can occur in periods of uncertainty. During these periods some insurers find the uncertainty too volatile causing them to scale back their services or withdraw them altogether, thereby reducing the capacity/competition in the market.
Essentially, this means there is a lack of interest in new business, capacity for risks reduce and therefore the market drives premiums upward. It stands to reason that as competition decreases and premiums increase, so too will renewal terms.
How market pressures affect attitudes to risk and crime
Are we more willing to take risks with our level of insurance?
Volatile consumer and financial markets also impact the decisions we make, especially as the overall cost of living increases. 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. Compromising on cover, or going without, simply means if something does go wrong you’ll have to take on the reinstatement costs yourself.
As the price of labour, goods, and services has increased recently, so too has the risk of being underinsured. Underinsurance is when the sums insured on your policy isn’t adequate to cover the reinstatement cost of your property or asset. It’s important to make sure you don’t confuse market value with rebuild cost, as the two are not the same.
Research also suggests that as inflation pushes up the cost of goods, this can lead to an increase in associated crime. Metal and heating oil theft have both been in the news recently as criminals take advantage of demand and rising prices.
For businesses, the risk of cyber-crime is far greater. Worryingly, 39% of UK businesses detected a cyber-attack in 2021/22, according to a government survey. More than 30% of businesses said they also experienced cyber-attacks at least once a week.
According to IBM’s Cost of a Data Breach Report 2021, the average total cost of a data breach in the UK was £3.95m. Whilst the majority of the cost will be attributed to larger corporations, the implications for a smaller business are still significant. Further, of the total cost, 38% is attributed to lost business, including the cost of acquiring new customers. Yet despite the regularity of cyber-attacks, and the financial and reputational consequences, less than half of businesses have cyber insurance.
How does inflation affect insurance?
Rising inflation can help drive a hard market as goods become more expensive and money simply doesn’t go as far as it used to. For example:
Greater rebuild costs
If you’ve got buildings insurance, the cost to rebuild your property (be it residential or commercial) will increase because of the rising cost of materials and lack of availability of labour. The rebuild cost should be reflected in the sums insured on your policy.
Figures show that the price of materials to build a three-bed home rose by 14% between January and September 2021. Some industry experts warn that costs could rise even further as the war in Ukraine disrupts supply chains.
Many policies are index-linked to automatically reflect changing prices. However, if the sums insured was incorrect when the policy was taken out, it will be wrong for the length of the policy, regardless of index linking. Therefore, it is vital that policyholders accurately calculate their sum insured based on the rebuild value plus the cost of associated services (such as debris removal, surveyors, architects etc).
It’s equally important to ensure that you’re not over-insured, as this will mean that you are paying a higher premium for a level of cover you don’t need.
This is how much the cost of a claim increases by, in relation to the increase in cost of associated materials, goods, and services. The same factors that drive inflation also increase the cost of a settled claim. For instance, if machinery parts and labour costs increase, repairs will cost the insurer more. Inevitably, this will lead to a rise in premiums as insurers look to recoup these losses.
Environmental factors can also cause claim costs to rise. Storms and flooding are on the rise in the UK, exasperated by certain construction methods and a lack of investment in UK drainage infrastructure, causing claims inflation for insurers.
How to reduce insurance premiums?
With all this in mind, it’s almost inevitable that rising prices are here to stay, at least in the short to medium term. To ensure you don’t compromise on insurance, you may be able to keep premiums down by:
- paying for your policy in one lump-sum could save you an instalment/credit charge if applicable;
- accurately calculating the sums insured for your buildings insurance to avoid over or under insuring your assets;
- making yourself an attractive risk to insurers, for example by investing in extra security for your vehicle or property, or having a robust cyber-security plan for your business.
- checking you’re not duplicating insurance, for example your business may have cover for tax and VAT investigations and disputes through your accountant, but this would also be covered under the Legal Expenses section of your business insurance.
- utilising the experience of an independent insurance broker like Alan Boswell Group. Fully independent insurance brokers have the expertise 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 hard insurance market, contact a member of the team on 01603 218000.