Impact of Inflation on Insurance: All You Need to Know

Inflation is a rising price level of goods and services. In the United States, the Consumer Price Index(CPI) measures inflation. The CPI measures the average changes in prices paid by consumers for a basket of goods and services.

The CPI basket includes food, housing, transportation, and medical care. In the previous five decades, consumer prices in the United States have been steadily increasing.

The only time prices dropped was during the financial crisis of 2009, when they did so for the first time since 1955. Between 1984 and 2020, the price level in the United States more than doubled.

In recent years, particularly in 2020, there has been an increase in health insurance and housing prices. These increases have been due to inflation and the COVID-19 pandemic.

That’s because businesses had to pay more for health insurance and rent. The pandemic also caused a decrease in demand for some goods and services. This decrease in sales led to a decline in prices for some items, such as travel and entertainment.

What Is the Impact of Inflation on Insurance?

Inflation has different effects on different sectors of the economy, but one sector that is particularly affected by inflation is the insurance industry.

During periods of high inflation, insurance companies face rising costs for claims payouts and increased operating costs. For insurers to offset these rising costs, they typically raise premiums, impacting consumers negatively.

In some cases, consumers may be forced to drop their coverage altogether due to the increased cost. In addition, inflation can also reduce the value of investments held by insurance companies, impacting the insurer’s solvency.

However, there are several ways insurers can try to protect themselves from the impact of inflation. For example, they may increase the length of time policies are in effect or raise the deductible amount a customer must pay before coverage begins. They may also reduce benefits or exclude specific perils from policies altogether.

How Does Inflation Affect Insurance and the Price of Insurance?

Inflation is one of the significant uncertainties of life. No one knows exactly how much prices will rise in the future or how those price increases will affect their ability to pay for things like insurance.

Nevertheless, inflation influences insurance in a few different ways. Here are the most notable effects:

• Costs for replacement and maintenance of infrastructure go up, affecting premiums charged to policyholders.
• Solvency margin requirements become more stringent in high inflationary periods; this acts as a brake on business activity and household income growth, leading to increased lapse rates, thus impacting policy pricing.
• The cost of goods and services increases, and so does the cost of premiums. That’s because insurers must account for the increased costs of claims payouts.
• Inflation erodes the buying power of money, which means that your premium payments may not go as far as they used to.
• Finally, if you have an adjustable-rate policy, your premiums could go up if inflation causes interest rates to rise.

Ultimately, however, how much inflation impacts your insurance costs depends on many factors, including the type of policy you have and the insurer you’re with.

Why Is It Happening Now?

Inflation in the insurance industry is something that happens from time to time. It’s natural for companies to reassess their costs and make adjustments based on the current market conditions.

That said, there are a few reasons why inflation might be happening more now than it has in the past.

For one, the cost of healthcare continues to rise. That means insurance companies have to pay more for claims, which eventually get passed down to consumers through higher premiums.

Secondly, we’re seeing an increase in natural disasters, which are also costly for insurance companies. Thirdly, the number of people covered by health insurance has increased thanks to the Affordable Care Act. It means that more people are using insurance, leading to higher prices.

Lastly, the insurance industry is becoming more competitive, leading to price hikes.

So, while it’s difficult to say exactly how much inflation will affect your insurance premiums, it’s essential to be aware of the potential impact and take action as needed. Contact us today for more insights and learn more about how we can help you secure the right insurance for your business.

This article is for general information purposes only. It is not insurance, tax, legal, business, or other advice. For specific insurance questions related to you or your business, please contact our office.  

Dan Levenson

See Full Bio