Property Values and Inflation Impacts on Insurance Premiums

The pains of inflation are being felt in every aspect of life from gasoline to groceries to insurance policies. In times like these, the best thing you can do to protect your assets is to ensure your property is accurately appraised and fully insured.  Understand property values and inflation impacts on insurance premiums in this informative discussion with our experts at Morris & Garritano.

According to the US Bureau of Labor Statistics, the Consumer Price Index (CPI) shows a 12-month increase of 9.1% in the cost of consumer goods as of June 2022. The pains of inflation are being felt in every aspect of life from gasoline to groceries to insurance policies. In times like these, the best thing you can do to protect your assets is to ensure your property is accurately appraised and fully insured.

Inflation today is influenced by a number of factors such as supply chain issues caused in part by the COVID-19 pandemic and skilled labor shortages. The unprecedented frequency and severity of catastrophic losses fueled by climate change have exacerbated these problems, causing a rise in expenses across industries.

Additionally, according to research by the US Bureau of Labor Statistics, the cost of construction has increased 28% over the last five years. In 2021 alone, total nonresidential reconstruction costs increased 16.5%, led by a 51% increase in structural steel, and a 22.7% increase in the cost of lumber.

What all this comes down to is increased expenses for consumers. Premiums are rising in many prominent areas of insurance coverage. Even policies with a “flat” renewal (a renewal with no increase in rate) might see premiums go up because the base value of the covered property has increased due to inflation.

Factors such as scarcity of materials, labor shortages, transportation, and logistics problems are also lengthening the time needed to repair or replace property after a loss, meaning replacement costs are higher and repairs are taking longer, further contributing to consumer pain points.

A recent study revealed that 75% of businesses are underinsured by an average of 40% or more. According to the Institute for Business and Home Safety, at least 25% of businesses that close following a major loss do not reopen. While it might be tempting to try to manage premiums by leaving your property values unchanged from year to year, this will actually work against you in the long run. Relying on outdated data can result in a large premium increase when underwriting requests an updated appraised value. In addition, many property policies contain coinsurance penalties that reduce the amount that can be recovered on a claim if the property is not insured to a stated percentage of value at the time of loss.  These penalties can be significant.  Most importantly, an underinsured business may not have enough coverage to rebuild or make it through an extended shutdown.

Besides regularly reviewing property replacement costs, you should also regularly reassess business income coverage limits to make sure there is adequate coverage in place should supply chain issues or labor shortages cause the rebuilding process to take longer than expected.

Not sure how to get started?  For the most accurate estimates of replacement costs, you may wish to consider retaining an appraiser experienced in valuing properties at replacement cost (as opposed to market value).  Another option is to consult with a local contractor familiar with the cost of materials and labor in your area.  The contractor should also be knowledgeable about the amount of time it would take to replace your property with another of similar size and construction.

At Morris & Garritano, we’re in the business of providing peace of mind by protecting what matters. You can reach out to your Account Manager at any time for questions or clarity regarding your policy and to ensure your coverage is working for you, helping you secure your goals and protect your future.