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How U.S. Inflation Is Impacting Commercial Insurance

Insurance, at its core, is a financial tool. This particular tool is used to manage risk, but there are a host of other financial tools that help our economy run efficiently. For example, banks are a tool used to manage funds between savers and borrowers. And all financial tools are affected by the U.S. economic climate, which is currently erratic.

Per the U.S. Bureau of Labor Statistics, inflation increased 3.2% in July 2023 from a year ago. That may not sound like a lot, but don’t let the small number fool you—the cost of everything is ballooning. Mark Zandi, chief economist at Moody’s Analytics, tweeted that, “Due to the high inflation, the typical household spent $202 more in a July than they did a year ago to buy the same goods and services. And they spent $709 more than they did 2 years ago.”

Considering this, it’s no surprise that commercial insurance, a central financial tool in our economy, is getting more expensive.

Why The Cost Of Commercial Insurance Is Rising

Insurers carefully calculate premiums based on a myriad of factors, all aiming to reflect the real-world cost of covering specific risks for a person or business. The premium calculation factors in several vital elements, chief among them being the costs associated with potential claims. These costs are directly correlated with prevailing prices in various markets, such as building materials, labor costs, auto repair pricing, attorney costs, and settlement amounts. If the cost to fix a car goes up, so will the cost of your commercial auto policy. If the price of rebuilding a damaged structure skyrockets, so does your commercial property premium. Insurance is simply a reflection of costs.

S&P Global recently reported that U.S. property and casualty (P&C) insurers suffered a $7.34 billion net underwriting loss in the first quarter of 2023, the industry’s first and largest loss in 12 years. S&P also stated that the loss was driven primarily by some of the worst personal lines results in recent memory, and losses continue to outpace earned premiums across all lines of business.

Bluntly, the only way insurers are able to stay in business and continue to cover risks is to dramatically raise premiums—it has never been pricier to settle claims related to property damage, auto repairs, and legal liabilities, among other things.

5 Ways Inflation Impacts Commercial Insurance

Here is a deeper dive into the specific ways commercial insurance prices are affected by inflation and why your premium is higher this year:

1. Rising Claims Costs

Again, inflation means the cost of goods and services is going up. If it’s more expensive to repair or replace damaged properties and vehicles, commercial insurers have to raise premiums to pay claims and maintain profitability.

2. Eroding Investment Income

Insurers invest a big portion of their premium income into various financial instruments to generate additional revenue. Inflation can erode the real return on these investments (i.e., return after accounting for inflation), creating a shortfall that needs to be covered.

3. Increasing Administrative Costs

Inflation leads to a general increase in the cost of doing business. From salaries to utilities, every operational aspect gets more expensive. Like any other business, insurers need to pay these bills.

4. Rising Reinsurance Costs

Insurers often purchase reinsurance to protect themselves from severe losses. However, reinsurance costs can rise during periods of high inflation. Insurers pass on these increased costs to policyholders through higher premiums.

5. Uncertainty and Risk

High inflation brings economic uncertainty, which inherently breeds risk for all organizations. Insurance companies facing an uncertain market will increase prices because "what if" is much riskier than a totally predictable future. For example, if next year is predicted to be another record year for inflation, insurers will price in that speculation. Additionally, if there is a chance the insurer won’t make money from investments, they will price that into their rates as well. Remember—insurance companies are publicly traded and need to show results, so they are going to err on the side of caution by increasing rates even more.

LandesBlosch’s Predictions for 2023 and 2024

Understanding the impacts of inflation on insurance premiums, it becomes clearer that there are crucial dynamics to watch as we move forward. Our industry predictions for the remainder of 2023 and into 2024 are:

Commercial Insurance Premiums Will Continue To Increase Until Insurance Companies Are Profitable

It doesn’t take a crystal ball to predict that premium prices are likely to continue their upward trajectory. The sharp rise in incurred losses and underwriting losses in 2022 showed us that insurance companies have yet to regain their profitability. Until the industry manages to realign its balance sheets, policyholders should brace themselves for continued premium increases.

Insurance Costs Will Follow Inflation Numbers (At A Minimum)

Inflation plays a pivotal role in this equation. If inflation persists or accelerates, the insurance industry will follow suit. The costs associated with claims, particularly in the realm of property repairs and auto maintenance, are directly linked to inflation. Rising costs of materials and labor naturally push up the cost of claims, which, in turn, exerts upward pressure on insurance premiums.

Property & Auto Will Likely Increase The Most

Among all the different insurance lines, property and auto insurance are poised to bear the brunt of these inflationary pressures. These two lines are particularly sensitive to inflation due to their close ties with tangible goods, like building materials and auto parts, whose prices have been significantly affected by inflation.

The Bottom Line

The outlook for 2023 and 2024 points towards continued adaptation in the commercial insurance industry. Insurers will need to employ innovative strategies and leverage technology to stay profitable while also executing on their mission—protecting businesses from risk. Policyholders should prepare for the likelihood of increased premiums.

For more insight into the current state of commercial insurance and how you can get coverage you can afford, contact us. We can help. Or get a fast, free quote online to see your options.

Austin Landes, CIC

About The Author: Austin Landes, CIC

Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.

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