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Commercial Insurance Client Conversation Guide on Inflation

March 8, 2024

Key Takeaways:

  • Persistent effects of inflation are a major challenge, and are having a lingering effect on many businesses. Underlying causes and effects on insurance costs may not be well understood by your commercial clients.
  • Inflation affects insurance rates largely because the dollar value of the risks being insured increases. Property values and replacement/repair costs is a key example of this phenomenon.
  • Business insurance customers may be at higher risk of exposures if they do not take certain steps to ensure adequate protection.
  • Loss control measures are important steps to help mitigate risks that may be exacerbated by inflation.

Some commercial customers may not be as well protected as they need to be, according to our recent property protection survey.

Read more about our survey results

How does inflation impact business insurance?

The annual inflation rate increased from 3.2% in 2011 to 8.3% in 2022. Inflation surged as high as 9.1% in June 2022.1

While the pace of inflation has cooled considerably, core inflation was 3.9% on an annual basis to open 2024.2 That is ahead of the Federal Reserve’s preferred target of 2% annually.

Inflation can have a significant impact on insurance rates, as well as other effects related to insurance coverage. While the specifics can be complicated and multi-variate, the simple way to understand how inflation may drive an increase in rates, is that the dollar value of the risks being insured goes up. Insurance losses increase even if the frequency of claims remains stable, because the costs of claims are inflated.

This substantial rising cost of claims can be seen across various categories of insurance losses, including medical services and vehicle repair/replacement. Perhaps most significantly for commercial insurance policies is the impact on commercial property.

Inflation and commercial property

Building materials

The cost of building materials has increase significantly since 2020, which leads to higher replacement costs for insured property. For example, if it cost $1 million dollars to replace a business’s real property last year, it might cost $1.2 million this year.

Overall, more than 82% of construction materials saw an average price increase of 19% since 2020. It’s projected that materials such as wood, concrete, gypsum, and insulation will see costs increase an average of 6.5% per year over the next two years.3

Extreme weather

After a record 28 billion-dollar disasters in 2023, severe weather events including thunderstorms, wildfires, heatwaves, and hurricanes have amassed more than $1 trillion in damages since 2017. It’s not just hurricanes that cause significant claims. Losses from extreme weather happen well away from the coasts. The costliest event in 2023 for insurers – $14.5 billion – was the heat wave and drought that gripped the South and Midwest. Convective storms throughout the year totaled more than $50 billion in damages – the highest annual amount ever recorded.4

Supply chain questions

Supply chain delays can also delay a business from returning to normal operations, which increases the severity of lost income. The bottleneck of container ships at ports made headlines in 2022. While this condition has abated, there are still concerns about global trade impacting prices. Conflict around the globe and piracy targeting shipping routes in the Suez region have impacted the movement of commodities and raw materials to their markets.5

Commercial insurance policyholder premiums

As increased repair and rebuilding costs raise claim severity, premium rates will ultimately reflect this inflated claim costs. Commercial property insurance rates have steadily increased since Q3 of 2017 and are expected to continue to rise. Experts predict premiums will increase between 6% to 8% this year.6

Commercial Property Cost Factors Infographic

What actions should business customers take to mitigate risks due to inflation?

  1. Implement risk management and loss control programs. Even during lower inflationary periods, a business’s bottom line can be impacted by the specific risks it faces. Creating a strong safety culture can reduce frequency and severity of losses and reduce the potential of out-of-pocket claims costs.
    • In addition, businesses that have established risk-mitigation practices — such as safety training for their employees, reinforcing the importance of loss prevention, and developing a business continuity plan — perform much better than businesses that do not have these characteristics.
    • Nationwide’s Loss Control Services provides expert consultation and 24/7 online resources to help businesses implement and sustain practices that reduce risk.
  2. Review business insurance policy details and coverage limits. Under the current economic conditions, one of the biggest questions for a commercial property owner to consider – from an insurance perspective – is if they have adequate coverage.
    • Review policy terms and conditions to ensure you are fully protected if a loss occurs.
    • Evaluate issues that could impact coverage, such as how labor and supply shortages may affect estimated replacement costs.
    • Confirm that replacement cost coverage is part of the policy and that the replacement cost estimate is accurate.
  3. Reassess property valuations. During inflationary periods, it’s especially important to review property valuations annually to ensure coverage is keeping pace with costs.
    • Detailed information on the covered property’s construction can impact the valuation. This review should include real property (buildings, pavement, land, plumbing, electrical, etc.), business personal property (such as furniture, machinery, supplies, tools, etc.) and business-income limits (loss of income or profits due to covered peril).
    • Insuring to value so that coverage keeps pace with the increase in the cost of repairs is critical. Business owners should consider how inadequate coverage or appropriate limits could impact their operations in the future.

Additional resources for commercial agents