Commercial Client Conversation Guide on Inflation

Key Takeaways:

• Inflation is a major challenge for many businesses. It also has a significant impact on business insurance coverage, but the underlying causes and effects may not be well understood by your commercial clients.
• Inflation affects insurance rates largely because the dollar value of the risks being insured increase. 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.
• Reviewing coverage to ensure appropriate limits and insuring-to-value is critical during an inflationary economy.
• Loss control measures are important steps to mitigate risks that may be exacerbated by inflation.

Despite widespread economic concerns, only 29% of business owners have talked with their agent to review their insurance policy this year.

Read more about Nationwide’s business owner research

How does inflation impact business insurance?

Inflation has surged above 9% during the past year, and is currently hovering just below 8%, as measured by official U.S. government statistics.¹

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.

Impact on commercial property

1. Construction materials. The largest spike in construction material costs in 50 years (22% increase this year)² 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.
2. Labor costs. In addition to inflation in building materials, the rise in labor costs also increases the total repair cost for building damage. Customers may find themselves underinsured, as it relates to estimated replacement cost for real property.
3. Business income. For business insurance policies that include loss of income, it is also critical to evaluate business income coverage limits. Inflation may impact sales, wages, and the amount of time to repair property, all of which could impact business income. Supply chain delays can also delay a business from returning to normal operations, which increases the severity of lost income.
4. Policyholder premiums.  As increased repair and rebuilding costs raise claim severity, premium rates will ultimately reflect this inflated claim costs.

Property Cost Factors Infographic

What Actions Should Business Customers Take?

1. Review 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.

1. • 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.
2. 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.
3. 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 training 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.

Additional Resources for Commercial Agents

• See all of Nationwide’s agent resources for Commercial Lines.
• Get more details on how inflation is impacting commercial insurance.
• Download this client-facing document as an aide to engaging in conversations, and understanding what’s driving the increase in property costs.
• Read about Nationwide’s market research on what business owners are saying about inflation and the economy.

Watch this video from Nationwide’s economic and commercial property experts discuss current economic conditions and market research on small business owner concerns.