Inflation Is Inevitable. Why Are Property Insurers Unprepared?

I remember when it became clear that the economy was barreling toward an inflationary period the likes of which the United States hasn’t experienced in 40 years.

It was Christmas 2020. My extended family was gathered in Naples, Florida, discussing Federal Reserve Chairman Jerome Powell’s policymaking decisions to double down on bond buying. My brother and I alone were concerned about the inevitable inflation that the trillions of monetary stimulus would cause when combined with significant COVID-related fiscal stimulus. During a press conference, Powell insisted, “It’s not going to be easy to have inflation move up. It took a long time to get inflation back to 2% in the last crisis.”

We didn’t believe that could be true. It wasn’t a matter of if inflation would happen but when and how high. While the writing was on the wall, few property insurers were prepared to appropriately respond to our current moment of inflationary impact, which would mean:

1. Getting insurance to value right from the outset.
2. Ensuring products can quickly respond to inflation when it moves.
3. Resolving to keep policyholders fully insured to value.

Construction material costs have risen 26.7% and construction labor rates have increased 5.5% year over year, according to Moody’s Investor Service. Inflationary factors are driving significantly higher repair and rebuilding costs, resulting in higher loss costs, especially in cat-prone markets where construction services are in extreme demand post disaster. Many insurers already weren’t getting insurance to value right up front, and in a high-inflation environment, underinsured properties will become even more underinsured, with multiple ramifications.

Underinsuring properties means policyholders won’t be able to fully rebuild their home after a major loss. Only 30% of insured homeowners had their property/casualty coverage increased to account for inflation, according to the American Property Causality Insurance Association.

It also hinders an insurer’s ability to collect the proper premium, increasing the likelihood of insolvency after catastrophes. Several insurance companies in Louisiana recently faced insolvency after Hurricane Ida in part due to not getting insurance to value right. When catastrophe model inputs are not based on full replacement cost, modeled losses are underestimated.

Knowing this, why aren’t insurers making the necessary adjustments to address inflation?

Getting insurance to value right up front has been an ongoing challenge for many insurers. Even before this period of inflation, more than two-thirds of U.S. homeowners were underinsured. The cause may be a lack of resources or tools to accurately assess property values, a practice of carrying forward expiring values at renewal, or lack of corporate initiative in prioritizing full insurance to value.

Products are another consideration. Insurers may not have coverage increases referenced in their products to quickly respond to inflation. Others may only have a yearly average inflation rate referenced in their products — usually 3% to 5%. They require regulatory approval to change the filings to address higher inflation rates, a time-consuming process that further exacerbates the gap in coverage levels and pricing.

Some may have the appropriate mechanisms built into their products to increase Coverage A, but they fear the disruption that large premium increases will bring, don’t have the technology to implement inflation adjustments quickly, or have underwriting tools that don’t adequately account for increased construction costs.

But we’ve seen firsthand that none of these scenarios need to be the status quo. Those who prioritize getting insurance to value right will require full replacement cost coverage at the time of binding with on-site physical inspections to validate values. They will have coverage level increases prebuilt into their products, accurate construction inflation data incorporated into their pricing, and technology to quickly implement coverage level and rate changes.

We might never see inflation like this again our lifetimes, but it’s better to be prepared than left behind.

Topics Carriers Property