If you’ve recently purchased a car, or renovated or constructed a home or business property, you’ve probably been faced with frustrating supply shortages and enormous price hikes. It’s a shocking reality that seems to be seeping into every aspect of business and life.
What Factors Are Impacting My Rates?
Inflation peaked at 9% in June 2022, and although the rate of inflation is slowing down, the insurance market is not able to adjust in real time.
- Material Shortages: Supply chain issues cause the cost of building and repair components to rise. Whether it’s the computer chips used in cars or construction materials like wood, these costs are passed on to customers.
- Labor Shortages: With fewer available skilled workers, companies may face operational challenges, slowing down repair or construction work. That inflates the cost of a claim, which in turn causes premiums to increase.
- Natural Disasters: In 2023 alone, the United States was hit with a total of 28 natural disasters costing a total of over $92.8 billion in losses. These significantly impact insurance premiums, as well as future conditions for securing coverage and the terms & conditions of those policies.
- Social Inflation: Insurance claims are becoming more expensive due increased litigation, escalating settlement costs and ‘nuclear verdicts,’ which are large jury awards given in personal injury or wrongful death lawsuits.
- Extended Repair Time: Due in part to the factors mentioned above, it takes significantly longer to repair or replace a damaged home or automobile today. This can lead to additional costs due to loss of use; for example, an extended stay in a hotel if your house is inhabitable or needing a rental car if your vehicle is in the shop.
Put simply, these factors mean that your stuff costs more to replace, and therefore it costs more to insure. Some may say that these inflated prices are the result of a hard insurance market, which is when rates start increasing and underwriting becomes more difficult, resulting in smaller coverage limits and higher premiums for businesses.
The cost to replace something today isn’t a dollar-for-dollar match like it’s been in the past. This applies to homes, factories, vehicles – anything property-related. So customers now have two main options to consider when it’s time for policy renewal.
You can either:
- Pay more in premiums, with the confidence that your insurance limits cover the total value of your assets.
- Lower coverage limits but run the risk of terms & conditions restrictions, and/or paying for additional costs in the event of property damage.
Terms & conditions restrictions can be tricky, so be careful.
If you insure your property at a lower value than the building can be replaced and you have a claim, the carrier can restrict or limit their payment for the claim based on the difference between the appraised value at the time of the loss and the amount you insured. Most commercial policies also include a “coinsurance” penalty. Coinsurance is a condition of the policy that attempts to restrict policyholders if they don’t insure their property to adequate limits.
Standard coinsurance is 80 percent for commercial clients, but we’re seeing carriers raise this as high as 90-100 percent in some cases. Meaning that if your coverage limits are not within 80-100 percent of your evaluated property value, they can limit the payment of a claim by the percentage you were underinsured.
You’ll also want to check with your agent on lower-cost replacement options like “functional replacement cost.” These coverage options can help lower your premiums but then allows the insurance carrier to reimburse you for lower cost (and likely lower quality) replacement items.
What Can I Do To Keep My Rates Down?
There are a few things you can do throughout the year to help keep your rates down.
- Proactively keep property in working order. Whether you’re insuring a home, a commercial building, a personal vehicle or an entire auto fleet, stay up-to-date with regular maintenance.
- Get an annual appraisal. This can help ensure you’ll pay fair premiums, and save you the headache of going toe-to-toe with underwriters on estimated values, avoiding the situation of claims paying out less than the property is truly worth.
- Consider increasing your deductible. It may seem like this will cost you more in the event of a claim, but you can handle more minor issues out-of-pocket, and the higher deductible will lower your premiums, potentially saving you money in the long run.
Be sure to discuss all of these options with your insurance broker or agent. Together, you can decide the best risk management strategy for your specific needs.
This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.