The cost of groceries is going up. But I don’t blame my grocers because the cost of everything they buy to provide us is going up.
The cost of home and auto insurance is going up. But it’s hard to blame insurance companies because everything they buy to provide us is going up.
What do insurance companies buy to provide us? They buy labor and materials to repair and replace damaged homes and autos, and they provide temporary homes and autos during repair.
What’s going on with the cost of labor and materials?
- 60% of builders have a skilled labor shortage
- First year of the pandemic lumber prices up 42%
- First three quarters of 2021 steel mill product cost up 81%
- 10/21 year over year new car prices up 11%
- 10/21 year over year used car prices up 32%
- Shortage of many car and home parts, most notably computer chips
What’s going on with the cost of temporary homes and autos?
- They’re more expensive for the reasons above
- Shortages are causing longer repair periods so the length of time people need temporary homes and autos has gone way up
In addition to all that, people are driving again so claims are up. First 6 months 2021 car fatalities up 16%.
Insurance costs are going up because the cost to provide the benefits of insurance is going up. But if you take your total insurance cost and divide by 365, your daily cost to protect all your assets from natural perils, accidents and lawsuits might not appear unreasonable.
So if grocers and insurance companies aren’t causing inflation, what is? Here’s a list of things that contribute to inflation:
- Position in business cycle
- Commodity production rates
- Employment restrictions
- Government-driven excess demand (deficit spending, artificially low interest rates, “money printing”)
- Reverse globalization (trade restrictions, transportation challenges)
- Demographics (immigration, birthrates)
- Lack of competition
- Inflation mindset (expecting inflation leads to more inflation)
It gets complicated. A new workplace safety regulation might increase the cost of a product but reflects society’s desire to be safer. Requiring airbags increases the cost of all cars but might be viewed as improved quality rather than inflation. And Jerome Powell, President of the Federal Reserve said inflation due to drivers like Covid employment restrictions is “transitory.” Interestingly, Mr. Powell more recently said we should stop using the term “transitory” which suggests our inflation issue is, well, not transitory.
Ok, back to insurance. The cause of inflation is arguable, but we know it’s affecting all insurance carriers. In addition, some carriers are actively trying to reduce their risk footprint: the Wall Street Journal reported (1/19/22) that carrier AIG is non-renewing 9,000 California homes with perceived wildfire risk and Chubb is doing something similar. So between inflation and claims issues it’s currently very difficult to switch carriers and get a significantly lower rate for the same quality coverage. And I certainly don’t recommend using any cheap low quality carriers that won’t be there when you need them.
I keep working to get the right insurance at the right price for my clients but it’s just not realistic to expect flat insurance rates when the price of everything else is going up.
There’s partial consolation knowing the value of your home and other assets is appreciating with inflation, which provides a positive offset to your expenses. As your home appreciates you should be mindful of your dwelling and contents limits at each renewal to ensure they are high enough to offset replacement cost. Homeowners policies typically have an automated inflation adjustment built in, but that standardized adjustment may be inadequate in high appreciation areas. Condo policies do not include an automatic inflation adjustment for contents (which typically include everything inside the sheetrock). Condo owners are encouraged take a hard look at their limits and ask if everything could be replaced for that number in today’s environment.
Call me if you want to review limits together or with any other questions. And feel free to send me an e-mail if you have views on this issue of inflation…I’m always interested in the client perspective.
Make it a great day!