Insurance rates are constantly changing in order to reflect societal changes. As changes come about, additional risks can develop. Increased risk means more expensive claims, and therefore higher insurance rates.

One factor that can affect insurance rates is inflation. As the general price of products and services go up, so does the cost of insurance. This blog post explains the reason for this and what this could mean for your insurance rates.

What Is Inflation?

Inflation is a term used to describe the general rise in the price of products and services over time. This results in less purchase power per dollar.

A classic example is the price of a cup of coffee over the last 50 years. In 1970, the average cup of coffee cost $0.25, but by 1990, the average cup of coffee cost $0.75, and by 2020, the average cup of coffee cost $1.59.

There are all kinds of things that can trigger inflation. We list some of the major causes of inflation below:

  • An increase in the supply of money is a common cause. When the Weimar Republic in Germany infamously started mass-printing money in the 1920s and giving it out to the population, the cost of a loaf of bread rose from 160 marks to 200,000,000,000 marks in the space of a year.
  • Increased supply of credit can also cause inflation. Introducing smart-chip enabled credit cards in the 1980s increased people’s ability to spend and led to prices increasing throughout the next two decades.
  • Product/service scarcity can also affect inflation. When a product or service is harder to get, the price of that product or service goes up. With essential goods, this can affect the entire economy.

The opposite of inflation is deflation (when prices go down). Inflation is typically healthier for the economy than deflation, providing that it is gradual. That said, seeing prices go up frustrates the average consumer.

Are We Witnessing a Period of Inflation Right Now?

In 2020, prices decreased because of lockdowns caused by the pandemic. Throughout these lockdowns, consumers were spending less money and so the price of goods fell to meet this demand. We can see this as a period of deflation.

However, as restrictions eased, consumers started spending money again and prices have been going up rapidly, now rapidly exceeding pre-pandemic prices. As a result, the US is now witnessing a period of inflation.

Product/service scarcity has played an important part in all of this. Many supplies have been harder to get recently because of ongoing travel restrictions and labor shortages caused by COVID-19. Many companies must pay more for supplies because of the increased challenges of getting these supplies. In turn, these companies must increase their prices to cover these costs.

How Does This Affect the Price of Insurance?

Many types of insurance are affected by the price of goods. For example, homeowner’s insurance is affected by the price of construction.

Construction prices are currently on the rise. This is due to labor shortages in the construction industry and reduced access to supplies such as lumber. The cost of lumber has gone up dramatically in the last year, which has caused construction project prices to increase as a result.

Homeowners insurance covers the cost of home repairs caused by disasters like fires, natural disasters, and burglary. Higher construction costs have resulted in bigger homeowners’ insurance claims. Many insurers are increasing their prices so that they can cover these claims.

Many insurance policies will include ‘inflation guard’, which is a provision that allows insurance companies to adjust the price in tandem with inflation levels. If you’ve seen your homeowners insurance rates increase over the last year, this ‘inflation guard’ provision could be the reason.

It’s important to note that there are laws in place across the US that prevent insurers from making unreasonable price hikes. If your rates go up, it will be level with inflation rates.

Are All Forms of Insurance Likely to Increase in Value?

Inflation affects individual products and services differently. As a result, not all forms of insurance are likely to increase in cost equally.

For example, if you own a business and have taken out several policies, you may find that some of these policies are more affected by inflation levels than others. Commercial property insurance rates may increase to match rising construction costs, however, you could find that worker’s compensation rates are not as drastically affected. This is because an increase in working from home has resulted in a reduction in claims in some industries.

By checking all your insurance policies, you can work out which ones have been most affected by inflation. Remember, there are many other factors affecting your insurance rates. An increase in rates from last year may not be because of inflation. Your insurer should be able to tell you why your prices have gone up.

What Can I Do About These Rising Insurance Rates?

Nobody likes it when their bills increase. Fortunately, your insurance rates are something that you can easily take control of. Many modern insurers allow you to fully personalize your insurance policy. You may find that you’re able to reduce your insurance rates simply by:

  • Removing certain types of coverage from your plan
  • Raising your deductible/excess
  • Reducing your maximum coverage
  • Paying annually instead of monthly
  • Shopping around for insurance rates

Ultimately, you want to find an insurer that offers a range of personalization options, so that you can reduce your insurance rates while getting the best coverage for your needs. At Schumacher Insurance Agency, we aim to provide fully customizable plans that can help you cover as much risk as possible while saving you money.

Get in touch with us here to see what we can do for you!