If you are like many Americans today, you are experiencing “sticker shock” in different ways, including grocery costs, utility increases, and fuel prices. One unlikely connection that most people are unaware of is how increases in inflation are also increasing the price of insurance. This is especially true in the rate of property insurance. Construction costs, including the supply of material and the demand for new construction, factor in with inflation when insurance is estimated for a property.
There are many reasons for inflation to increase but one factor is the shortage of supply, which was widespread during the COVID pandemic and is still an issue within some industries.
But, Why Should Insurance Rates Go Up When Your Property Hasn’t Changed?
Insurance premiums are set by a number of factors, such as age, the buyers debt level, years to repair and property value. Inflation is also a consideration, especially as insurance companies consider the replacement costs of those materials in case of damage.
The issue with insurance rates rising is with the replacement cost if there is a claim. Even though you may not have changed your property (no upgrades or improvements), the value of your property has gone up because of demand and competition. Meaning that if there is a claim, the cost to replace your property will go up as well.
Property owners should recognize that insurance premiums are affected by inflation due to increased prices, as insurance policies have to estimate the cost of labor and materials at the time of a loss.
Higher Prices; Fewer Construction Workers
Beyond construction materials, the available labor force has decreased sharply, partly due to the pandemic and partly due to fewer laborers in the work force overall. During the pandemic, many businesses that support construction were shut down for long periods.
This forced workers to look outside of the construction industry for jobs. That dip in available, qualified labor continues to be a problem across many industries and organizations. There remains a high demand and low supply of workers in the current job market.
Rising Insurance Rates are About the Cost of the Claim
Going back to insurance rates, a lack of labor and lack of materials means insurance companies need to estimate a higher replacement value for insured property. If inflation rates are expected to rise within the period of an insurance policy, then insurance carriers need to include that in their price.
The effects of inflation on building and property insurance has also reached the auto, healthcare, and even life insurance industries. Please take a moment to research how this may impact you. Or, better yet, contact your Aitken & Ormond Agent today to discuss any questions you may have. We are happy to be of service!