Inflation has surged recently due to a host of factors, including supply chain disruptions and the global pandemic. Prices for everything – the cars we drive, the food we eat, the clothes we wear – have increased and are continuing to go up. In fact, the latest Consumer Price Index (CPI) reading from the Bureau of Labor Statistics shows that prices rose 7.9% over the last 12 months which is the highest rate in over 40 years. (1) So, what ramifications does this have on insurance?
Every year when businesses renew their insurance policies, there are typically two areas of focus. First, what type of coverage is being purchased and what are the terms? This dictates what insurance will cover in the event something happens. The second factor is how much insurance should be purchased. Insurance policies do not simply pay out an unlimited amount of money, but rather provide coverage up to a set limit that the policyholder chooses to purchase. Historically, the typical insurance renewal process sees little change in either of these areas year-over-year. However, the recent spike in inflation has changed that and put a greater spotlight on the insured values of organizations.
Consider an apartment complex that has 200 individual apartment units spread across multiple buildings. The policyholder purchases property insurance to cover any property damage or business interruption losses resulting from a disaster such as a fire.
In the past, the replacement cost value (RCV) of the property being insured would not change much each year. However, this year, with the cost of building materials increasing significantly, the cost to repair or replace property is significantly higher. As an example, the price of lumber has reached all-time highs over the past twelve months and continues to be volatile. If a building was valued at $10,000,000 before the pandemic, there is a good chance that the cost to replace that building is now at least $11,000,000, if not more.
On the business income side, the impacts may be less obvious but are just as significant. Many markets including Austin, TX and Phoenix, AZ are experiencing huge increases in rents as the housing market grapples with a lack of supply. In some instances, rents are up 15%
from the prior year. This translates into a potential business interruption loss that could be 15% higher. Not only this, but were a loss to occur, the timeline to repair or replace the damaged property could be much longer due to supply chain issues. What might have taken three months to repair in the past now may take six months due to longer lead times for things like appliances, roofing material and other essential building components. This could ultimately lead to larger business interruption losses than what was anticipated only a few years ago.
Now more than ever, it's important that organizations perform a thorough evaluation of their insurance limits to reduce the risk of being under-insured. Otherwise, a policyholder may end up having to pay a significant amount of money out of their own pocket should a loss occur. At RCG, we specialize in helping organizations with pre-loss assessments of their business interruption exposure to help guide the insurance purchasing process and avoid significant financial losses.
(1) https://www.bls.gov/cpi/
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