What Is The Impact Of Inflation
On The Commercial Insurance Market?

So What is the impact of inflation on the commercial insurance market? Inflation-related issues have primarily resulted from labor shortages, and supply trend issues brought on by worldwide shutdowns during the pandemic; this contributed to the rising Consumer Price Index (CPI).

Data from the Bureau of Labor Statics, the CPI of all urban consumers saw a steep increase of 7% in 2021, representing the single most significant increase during a 12-month period since the early 80s.

Several factors contribute to rising inflation and its knock-on effect on business and commercial insurance. Below we'll examine these key factors and their effects:

Price Hikes

What is the impact of inflation on the commercial insurance market? One of the reasons for the recent increase in property damage insurance premiums is the escalating costs of raw materials, particularly copper and steel. The increased demand has made it difficult for insurers to estimate future costs.

However, a recent study found that the value of a commercial property could be undervalued by as much as 30% in November 2021. The recent increase in the consumer price index (CPI) is evidence of higher inflationary trends in the United States.

Meanwhile, the COVID-19 pandemic contributes to price hikes in many other countries as well. Economists are not as surprised by the rise in inflation as they were back in the 80s because it was expected to a certain extent. However, the increase in inflation is likely to stabilize over the next two years once supply and demand imbalances are addressed.

Social Inflation

What is the impact of inflation on the commercial insurance market? Understanding social inflation and its impact on the commercial insurance market requires understanding the changing nature of the risk landscape. To ensure the most effective use of available data, insurance carriers should understand the strengths and weaknesses of each dataset and identify risks that may be influenced by social inflation.

Insurance carriers need to offer excess coverage to their clients to maximize claims management efficiency and make it easy for producers to explain why they are essential to the business. For example, the economic downturn and climate change may affect the cost of insurance and premiums.

Social inflation has become a growing concern for insurers due to the abuses of the legal system. These abuses lead to massive verdicts and defense costs, undoubtedly becoming a significant burden on businesses. Since keeping up with the rising costs of these types of lawsuits has become more expensive, that expense is reflected in higher premiums payments.

Supply Chain Disruptions

What is the impact of inflation on the commercial insurance market? The impact of supply chain disruptions is enormous. Companies can experience huge losses when a single issue interrupts the entire supply chain. Recent studies show that supply chain problems adversely impacted 45% of businesses.

Supply chain insurance programs can help mitigate the financial effects of these disruptions. The policies cover the entire supply chain, from raw materials to the final product. In addition to protecting a company's inventory, these policies cover downtime and other costs.

The recent financial downturn caused by rising inflation on the back of the pandemic has exposed the holes in the supply chains of many businesses. Forced closures of facilities worldwide, quarantine requirements, and capacity restrictions in almost every industry are one of the leading causes of these disruptions.

Disruptions like these have forced companies to suspend operations and adjust their price plans. In many cases, they've already lost money, and the insurers, in many cases, have had to foot the bill for it. That has, in many instances, led to a rise in premiums for various categories of businesses.

Litigation Funding

What is the impact of inflation on the commercial insurance market? Inflation can affect the cost of insurance, affecting premiums, underwriting, and claims. For example, if an attorney's fee were prohibitively high, it would deter many plaintiffs from pursuing their cases.

Third-party litigation funding firms, a billion-dollar global industry, fund lawsuits in exchange for a percentage of the eventual settlement. Such financing methods are increasingly common in civil litigation, where attorneys' fees rise with a perception of social inequalities.

While the impact of inflation varies greatly, the key fact is that insurers hold liabilities in loss reserves for the future. As a result, higher inflation raises future claims costs. This leads to higher incurred loss ratios and less stable resources.

Despite these risks, rising inflation will not necessarily lead to lower premiums for the insured; instead, it will only increase the cost of their insurance. The combined ratio of the P/C industry may increase by two or three percentage points, depending on the line of business and the sector.