Does Sky-High Inflation Impact Insurance Premiums?
In the spirit of the preceding two years, 2022 has been replete with big news stories. But it is one of the less exciting stories that affects just about everyone: inflation. Inflation was already rising in 2021 at a rapid rate. With sanctions on Russia, among other things, inflation has only continued to increase. It is sky high and people are struggling to make ends meet.
Inflation directly impacts consumer goods, but it has a knock-on effect on many other things. Labor becomes more expensive because people need more money to live. Services become more expensive because individuals need expensive fuel to get around.
But what about insurance? Insurance premiums are calculated according to a large number of factors and are not meant to look only at current prices. Furthermore, while insurance products like auto insurance are more directly related to the cost of consumer goods, the same cannot be said with homeowners insurance. Homeowners insurance has a lot more to do with long-term factors, and takes the state of the property market into account as well.
So, let’s take a look at how sky-high inflation does or does not impact insurance premiums.
We’ll start by talking about existing policies. Insurers cannot just raise the price of existing policies until they come up for review. But what happens if someone needs to claim in 2022 and prices are much higher than they were in 2021? Do they have to settle for a payout that won’t cover costs?
That will depend on individual insurers and policies. However, most insurance comes with inflation protection. This is a clause that confirms the insurer will pay out a value commensurate with the impact of inflation, even if the policy was taken out when prices were lower.
When these policies come up for review, inflation may drive their prices up. But for now, those premiums will remain the same and should dispense reasonable payouts.
Many new homeowners ask what they should be paying for their homeowners insurance based on the value of their home. But this question is not strictly relevant. While home values are often used as a starting point for guesstimates, they are not an accurate measure and certainly fall short in our current climate. Housing prices have been rising rapidly due to factors that have little to do with construction costs.
Your homeowners insurance needs to cover what it would cost to rebuild your home and not what it would cost to buy a new home. As such, you can do a lot of the legwork in calculating how much coverage you need. This includes construction costs as well as the replacement costs of the home contents.
In this context, you have some say in how much your premium will cost. If you are looking at things from a long-term perspective, you may consider inflation as a temporary factor. However, that sets you up for underinsuring your home. And, if something happens to your home in the near future, you will be stuck having to pay high construction and replacement costs anyway.
So, while inflation does not have to impact homeowners insurance policies, it almost inevitably does.
Auto insurance is also impacted by insurance, considering that cars are becoming much more expensive to manufacture. Furthermore, repairing your car will cost more due to supply-chain demands as well as the inflated price of parts. Again, if you have an existing policy, you are probably protected from inflationary factors. And, if prices return to normal by the time your policy renews, you may manage to dodge a major increase.
What about long-term insurance like life insurance? That very much depends on you. There is no hard-and-fast rule as to how much life insurance you need. It depends on your cost of living, your dependents’ needs and personal income, and many other factors. Due to inflation, living is becoming more expensive and at the moment they may need more than your policy would offer.
There is a tough choice to be made here, and one that should not be too reactionary. It will be a while still before your current life insurance policy is no longer sufficient. Take some time to consider the possibilities before raising the cost of your policy.
Everything is impacted by inflation, although it is not always so direct. Insurance premiums are becoming more expensive, but this may not last. In light of world events becoming more rather than less complex, it will be a while before we have any sort of certainty.