How inflation is impacting insurance premiums

• Rising inflation can mean higher premiums for customers
• When inflation rises, it’s important to ensure sums insured are accurate
• Reducing frequency of claims and raising excesses helps customers manage costs.

Inflation hit the headlines this year as central banks sought to contain asset price growth with sharp interest rate rises. But inflation’s impact goes beyond interest rates. It’s one of the most important variables for the insurance sector, influencing everything from risk appetite to premiums.

That’s because as inflation rises, insurers’ input costs such as building and labour also increase. Let’s say a customer owns their business premises, which suffers extensive storm damage. Even the cost of the builder’s fuel used to travel from site to site increases, which means the cost to settle the claim is higher.

Brokers play an important role helping customers navigate a changing insurance landscape in this economic environment.

Impact on policyholders: check for underinsurance

Like a rising tide, asset values lift with inflation. Which means one of the biggest risks of inflation for policyholders is wrong asset valuations when determining the level of cover. So, when inflation is on the rise, sums insured need to be increased to avoid underinsurance.

If the sum insured at the time of the event is less than 80 per cent, insurers will only pay a proportion of costs to rectify the loss. That means the customer is essentially, though often unknowingly, self-insuring the uninsured component.¹

Impact on claims: rising costs – short-term and long-term effects

It’s also important to understand rising inflation is a key variable to consider when estimating the value of future claims. Insurers take many aspects into consideration when determining their risk appetite.

Short-tail claims can be settled relatively quickly and include simple things like a car insurance claim for a broken windscreen. Long-tail claims can take several years and include complex claims such as those relating to an injury due to a car accident.

Impact on premiums: as costs rise, so do premiums

Premiums are directly affected as the cost to settle claims rises with inflation. At QBE, we take steps to smooth out premium increases through the market cycle, so customers are not shocked by sharp price spikes due to rising inflation. For instance, we balance out excess values and premiums, lifting the excess where appropriate to keep a lid on premiums.

Finally, consider explaining to customers the impact frequent claims have on the cost of cover. The more often they make a claim the higher their premiums, and also their excess, because insurers view them as a riskier policyholder.

Businesses large and small are under pressure like never before, with escalating costs, talent shortages and an uncertain outlook just some of the challenges they are facing. With another La Ninā weather event likely to herald a rainy summer, now’s the time to ensure your customers’ cover is fit for purpose.

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¹ As per interview with Andrew Norris, National Portfolio Manager – Commercial Packages, QBE, September 2022