Inflation and other economic trends are increasing expenses for insurers and policyholders, driving the need for change.

Key takeaways:

  • The world is going through a period of significant economic instability.
  • Inflation is forcing prices upward, creating additional expenses for everyone.
  • The insurance industry will take years to recover from the effects of inflation.
  • Policyholders will have to work to secure the best possible rates.

Economic instability is creating havoc in the insurance industry. Inflation is a primary culprit — everything costs more than it did a couple of years ago. It will take years for insurance premiums to match inflation, forcing insurers to take losses on many personal insurance policies.

Policyholders are feeling the pinch because they’re seeing premiums uniformly increase. They could also find themselves underinsured because they might reach their coverage limits far more rapidly. 

We’re entering a transitional period in the insurance industry. Here’s a look at how economic instability is impacting insurance providers and customers and how the industry is responding to these changes.

Economic factors affecting insurance

Inflation is a primary factor influencing insurance industry economics. For instance, when an auto insurance policyholder is in an accident, they will file a claim. However, because the parts, labor, and other expenses are higher than they were a few years ago, it’s becoming more challenging for insurance companies to recoup money through existing premiums. 

This also applies for homeowners’ policies, as construction materials, appliances, furniture, personal belongings, and labor are becoming increasingly expensive, leaving insurance companies scrambling to cover losses. The uptick in extreme weather caused by climate change also contributes to these losses because significant home damage is more prevalent.

According to a study by TransUnion, it will take up to five years of standard premium growth for the insurance industry to recover from four years of inflation. And that number depends on a decade of regular replacement cost increases. If we hit another inflationary period, it will take insurance companies even longer to recover.

Another issue with increasing costs is that policyholders are hitting their coverage limits sooner than expected. When a home is valued at $600,000, a policyholder will typically purchase insurance covering 80% of the home’s replacement value, or $480,000. 

However, since building material and labor costs have increased, damage to the home might reach that $480,000 limit faster than anticipated. This issue leaves homeowners paying out of pocket for damage not covered by insurance despite having the recommended coverage.

The role of technology in reshaping insurance economics

Technology represents a massive insurance industry change. Namely, insurers now rely on cloud computing and AI to streamline the underwriting and claims management processes, cutting costs. 

Cloud-based storage makes it easier for policyholders to file claims online. They can send and receive information remotely, so they don’t have to visit an insurance office to complete many tasks. 

For an insurer, cloud computing saves money because it means employees spend less time processing paperwork and entering data. Cutting costs this way could be mandatory moving forward as insurers attempt to recover from this economic instability. 

AI also saves insurers money by streamlining much of the underwriting process. This technology can analyze data instantly, allowing insurance companies to offer tailored insurance products that meet their customers’ needs without any additional work. The result is a win-win for everyone involved.

How the insurance industry is adapting

As the insurance industry relies more heavily on AI, we’ll see even more changes in how it operates. For instance, this technology can create detailed risk profiles on each customer based on demographic, telematic, and location data. It allows insurers to develop new premium structures based on collected information. 

We’ll also see more dynamic predictive premium models that protect insurance companies as much as possible. Minimizing risk will be vital as insurers recover from this inflationary period, so using technology and new methods of securing and analyzing data will be essential. 

Mitigation strategies for policyholders

Of course, policyholders will have to look for new ways to save money. It’s a near certainty that insurance companies will continue raising rates to recoup losses, so developing cost-reducing strategies will be essential.

First, ensure you regularly review your insurance policy. This process can involve meeting with your insurance agent and asking questions about your current coverage. If there’s anywhere to cut costs, do so. 

At the same time, you’ll want to look at your current policy limits during this review to ensure you have enough insurance. If your home is worth far more than it was a few years ago, an upgraded policy could be necessary.

Also, make your insurance protects you as your net worth grows. Property insurance can cover liability if someone is injured on your property and tries to sue, the necessary coverage amount depends on your assets.

Developing your ideal insurance solutions can be challenging when looking for the lowest possible premiums and sufficient protection. It’s a juggling act, but worth the peace of mind good coverage provides. 

The complex relationship between economics and insurance

The current economic instability won’t last forever, but insurance solutions will always dynamic — you’ll need to continually adjust to ensure you have the right coverage. Your premiums could also change, but staying on top of trends and gathering information helps secure the best possible rates.

NICRIS Insurance offers personalized insurance reviews for our clients in New York State. This free service ensures you understand your coverage and its limitations, and where savings are available. Contact NICRIS Insurance to book your appointment today.