The Impact of Inflation on Insurance Limits

There’s talk about inflation everywhere these days, as the world reels from and braces for ever-rising prices. Simply put, inflation refers to the rate of increasing prices of goods and services over time. 

While many aspects of the global economy trigger inflation, the Russian-Ukrainian conflict, and the continuing pandemic are major contributors to the increased inflation rate right now. Between the sanctions placed on Russian goods, particularly exports of oil and grain, and the supply chain disruption and labor shortage exasperated by the pandemic, we’re experiencing supply shortages and increased demand, causing prices to spike. 

The impact of inflation can be felt everywhere: from the gas pump to the grocery check-out line. In addition to increased energy and food prices, we anticipate an impact on insurance limits because inflation is disrupting purchasing prices and replacement values due to the rising cost of labor and raw materials.

Rising inflation can increase the risk of underinsurance, which occurs when the declared value of insured assets dips below actual values. For clients, this means their insurance policy’s Limits may not be keeping up with their assets’ estimated worth. 

So, what happens if you’re underinsured due to inflation? Well, if you incur a loss, you could experience one of the following scenarios:

• If the value of your assets or exposures has increased, your current limits may not be high enough to cover the full incident.
• Certain clauses in your policy may allow the insurer to lower your claim recovery based on the difference between the insured value and actual value (co-insurance penalty). 
• You may incur uninsured business interruption losses due to a lack of readily available supplies required in manufacturing.

To prevent underinsurance, we recommend:

• Consulting with a valuation specialist to reevaluate the cost of your assets and exposures.
• Scheduling meetings with your insurance broker to review your supply chain and discuss and strategize your policy(s), including limits of insurance provided,  based on inflation trends. Note: This may require making changes before the upcoming renewal process. 
• Understanding your insurance terms and conditions and familiarizing yourself with any coinsurance or average clauses in your insurance terms.
• Ensuring you have risk management and contingency measures in place to minimize disruption and maximize resilience. 

Inflation may be inevitable right now, but that doesn’t mean you should let it blindside you when it comes to your insurance policy. For more information about your insurance coverage, contact us today.