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The Impact of Inflation on Insurance Rates

Jan 12, 2023

Insurance

The Impact of Inflation on Insurance Rates

With record inflation impacting almost every corner of the economy, it's no surprise that the insurance industry must also raise rates to cover the increasing costs associated with repairing or replacing your most valuable assets.

Unfortunately, anyone who owns a car or a home has likely been hit already by one of the drivers of high inflation.

Automobile Insurance

Supply chain issues. Fewer cars, higher prices. More frequent and severe accidents. Together, these market trends are making auto claims more expensive, requiring insurance companies to increase what you pay for auto insurance.

As most people know, supply chain issues kicked off a myriad of increases, especially in the auto industry. With automakers struggling to maintain new vehicle inventory, the cost of new cars, as measured by the U.S. Bureau of Labor Statistics consumer price index, increased 16% from January 2021 to July 2022. With consumers unable to find new cars, the demand shifted to used vehicles, and the impact was even more significant. As a result, the consumer price index for used cars and trucks jumped by 40.5% from January 2021 to January 2022. That means within a year, the average price of used cars and trucks for urban consumers has increased by 40.5%.

The auto parts cost also increased, causing vehicle repair costs to increase. Generally, car parts are a stable commodity, with just 3% annual increases from 2017 to 2020. However, in 2021 that all changed, with a 10% increase followed by a 12% increase for the first half of 2022.*

To make matters worse, severe accidents are happening more often. In the first six months of 2021, nearly 2.5 million people sustained injuries requiring consultation with a medical professional. In addition, accident fatalities in Jan 2022 were 14% higher than in Jan 2020.** More frequent and severe auto accidents increase the number and cost of auto insurance claims.

Homeowners Insurance

Low housing inventory. Historic demand. Skyrocketing materials costs. Skilled labor shortage. What some call "the perfect storm" of market trends has driven up the cost of building homes and, therefore, insuring them for repair and replacement.

New home construction pricing was up 17% from January to August 2022, bringing the total increase from the start of the pandemic to 35%.* Looking at the rising cost of materials, it's not hard to see why construction costs – such as repair or renovation after a homeowner's claim – are up so much. Lumber pricing more than doubled during the pandemic, and despite recent decreases, pricing is still up 50% from March 2020. On top of that, a shortage of skilled labor.

Homeowners insurance covers you for "replacement cost," the amount it would take to repair, replace, or rebuild your home at current construction materials and labor prices. When you insure your home for its estimated replacement cost, you help to ensure you have the coverage you need to repair or rebuild if a covered loss damages it. As labor and materials costs rise, so will your insurance rates to cover you in case of loss.

Is there anything that can be done?

All of us are feeling the effects of inflation, and there is almost no industry that isn't impacted by rising rates. Work with your trusted advisor at Tompkins Insurance to learn more about steps you can consider.

  • Check for any multi-policy discounts such as home/auto bundling and multi-car
  • Identify additional policy options that might save you money in case of an accident or claim
  • Consider any upgrades that may qualify for home safety feature discounts (i.e., installing smoke detectors, water sensors, home security systems, smart home technology)
  • Make home improvements (i.e., roof replacement, replacement aging pipes, update electrical wiring, add automatic shutoff devices) for possible discounts
  • Practice safe driving habits as speeds have increased

Sources:

* U.S. Bureau of Labor Statistics Consumer Price Index, as reported by Cincinnati Insurance

** National Safety Council, New York Times, as reported by Safeco Insurance

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