Brought on by pandemic-related labor and supply issues, inflation has become a growing concern and is clearly reflected in the rising Consumer Price Index (CPI). In fact, the latest Bureau of Labor Statistics (BLS) data reported the CPI for all urban consumers surged by 7% in 2021. This represents the largest increase over a 12-month period since 1982. Currently the CPI is averaging a historical 0.6% monthly increase.

These inflation challenges could create a number of difficulties for commercial insurance policyholders and insurers.

Key Causes of Inflation

Labor Shortages

The past year has seen labor shortages in nearly all sectors. In fact, a recent study from the Society for Human Resource Management (SHRM) found that almost 90% of businesses are experiencing struggles in filling open positions. These widespread labor shortages are attributed to various influences.

Primarily, the impact of the pandemic has triggered many workers to reevaluate their employment priorities and deterred unemployed individuals from returning to the workforce. Staggeringly, the proportion of individuals who have been out of work for six months or longer is at its highest in 60 years.

These labor shortages have led to substantial struggles for businesses and caused operational delays. Some employers have even been forced to increase their compensation packages to retain or attract workers. Such trends have magnified overall labor costs and led to subsequent concerns. Some experts estimate nearly 85 million jobs could remain unfilled and project a trillion dollar loss of economic opportunity.

Supply Chain Disruptions

Supply chain disruptions have stemmed from increased demand for various items and materials amid production slowdowns during pandemic-related closures. Even as businesses have resumed normal operations and increased production levels, consumer demand has continued to outpace inventory. Contributing to inflation issues, the costs of many items and materials have soared to counterbalance demand.

Looking ahead, experts 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, the Russia-Ukraine war and other lasting pandemic impacts are expected to keep the inflation rate above pre-pandemic levels through at least 2023.

The Commercial Insurance Market’s Impact

Historically, prolonged inflation during the 1970s and 1980s caused reduced reserve levels, unpredictable claims trends and weaker underwriting performance. Insurers saw major losses and policyholders had multiple coverage challenges. The current insurance industry is better positioned to sustain reserve losses due to outsized investment gains. Furthermore, financial reporting advancements have provided insurers with additional capabilities to identify and respond to loss trends. The current inflation uncertainty could eventually threaten the long-term stability of the insurance industry’s reserve levels and underwriting profitability.

Commercial Property

Property insurance has suffered from a combination of inflated repair and rebuild costs, as well as construction workers shortages. Supply chain issues related to essential building materials has influenced prices to skyrocket. The National Association of Home Builders reports the costs of lumber and steel have more than doubled. Such inflation is further evidenced by the latest BLS data that shows a substantial CPI increase for a number of structural elements (e.g., floor coverings, window coverings, major appliances, overall construction materials).

Insurers are experiencing some poor underwriting results from elevated property loss costs. You should prepare for a potential increase in premium expenses and other coverage restrictions. Be sure to reevaluate your polices for underinsurance concerns.

Commercial Auto

The commercial auto market has been heavily affected by surging repairs and claims, worker shortages and supply chain disruptions. According to the BLS, these concerns are reflected in an increased CPI for auto parts, motor vehicle repairs, and used cars and trucks. Skyrocketing accident frequency and severity have evolved from rising crash rates and inflated medical treatment expenses. These conditions could eventually influence underwriting losses and impact policyholders with heightened premium expenses and coverage restrictions.

Steps to Mitigate Complications

Inflation has the potential to heighten your premium costs, influence coverage restrictions and promote underinsurance concerns. You can minimize these complications by implementing the following steps:

1. Start Early

Schedule in advance with your trusted insurance broker to strategize for the upcoming renewal process. They can help you understand current inflation trends and how they affect your policy. Starting early will also provide you time to prepare for potential policy changes. While inflation remains volatile, you may also want to schedule quarterly broker meetings to adjust coverages to current market conditions.

2. Review Coverage Terms & Conditions

Your broker should assist with reviewing your current coverage terms and conditions, especially any exclusions. Verify your policy limits and potential sub limits are adequate to cover a loss. Should any underinsurance issues be identified, you can ensure proper protection by updating coverages and purchasing policy endorsements.

3. Reassess Property Valuations

Verify your commercial property insurance coverage reflects correct property valuations. Confirm your current policy will cover recovery expenses after a loss in light of current property repair and rebuilding cost inflations. Outdated valuations could leave you underinsured if expenses exceed your existing coverage limits.

4. Ensure Adequate Risk Management Practices

Risk management measures can save your organization from unnecessary exposures. Your risk advisor can verify you have effective risk management measures in place to prevent potential claims. Your broker can also help you qualify for premium discounts or prevent increases with risk mitigation documentation for underwriters.

We’re Here to Help

As the economy continues to suffer from historic inflation, you’re not in this alone. We’re here to help you not only understand how inflation affects your insurance but also suggest risk management strategies to lessen your policy’s impact. To learn more about how the commercial insurance market is adjusting to current inflation trends, connect with a member of our team.