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The Impact of Inflation on the Commercial Insurance Market

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Over the past year, inflation has become a growing concern. Inflation issues have largely resulted from a culmination of labor and supply trends brought on by the COVID-19 pandemic, and they are clearly reflected within the country’s rising Consumer Price Index (CPI), According to the latest data from the Bureau of Labor Statistics (BLS), the CPI for all urban consumers surged by 7% in 2021 – representing the largest increase over a 12-month period since 1982.

Inflation issues could create a number of challenges in the commercial insurance market, affecting both insurers and their policyholders. With this in mind, it’s crucial for insureds to have a clear understanding of inflation and take steps to ensure adequate coverage during these difficult market conditions.

Review the following article to learn more about the primary reasons for current inflation issues, how these issues affect the commercial insurance market and what policyholders can do to mitigate related coverage concerns.

Key Causes of Inflation

Several factors have contributed to rising inflation concerns – namely, widespread labor shortages and supply chain disruptions amid the ongoing COVID-19 pandemic. Here’s a breakdown of these factors:

Looking ahead, both economists and the federal government anticipate supply chain conditions to improve in the latter half of 2022, lowering the risk of disruptions and helping ease inflation concerns. Yet, a combination of continued labor struggles and other lasting impacts from COVID-19 are expected to keep the inflation rate above pre-pandemic levels through at least 2023. As such, inflation issues may persist for the foreseeable future.

Impact on the Commercial Insurance Market

Rising inflation concerns can pose several difficulties in the commercial insurance market. Looking back, when prolonged inflation issues took place between the 1970s and 1980s, the insurance industry faced numerous consequences. Specifically, the commercial insurance market encountered reduced reserve levels, unpredictable claims trends and weaker underwriting performance – causing major losses for insurers and greater coverage challenges for policyholders.

It’s important to note that the insurance industry as a whole is currently better positioned to incur losses to its reserves when compared to previous periods of extended inflations due to outsized investment gains. Furthermore, advances in financial reporting processes have given insurers additional capabilities to identify and respond to loss trends. However, uncertainty surrounding how long existing inflations issues will last could eventually threaten the long-term stability of the insurance industry’s reserve levels and underwriting profitability. Take a closer look at specific lines of coverage, the following markets are at risk of being impacted by rising inflation:

Although it’s currently making the most significant impact on the property and auto insurance markets, such prolonged inflation will likely begin to affect additional segments – such as the workers’ compensation and liability insurance spaces – over time. This means that insurers could face difficulties in maintaining insurance pricing to keep up with more volatile loss trends. To prevent unanticipated loss costs and increased loss ratios due to rising inflation concerns, insurers may need to continue increasing overall premium expenses and making other coverage adjustments.

Steps Insureds Can Take

Because ongoing inflation issues have the potential to result in heightened premium costs, coverage restrictions and underinsurance concerns, it’s important for policyholders to do what they can to minimize such complications. Some steps that insureds can take include the following:

For more coverage guidance, contact us today!

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