How Does Inflation Affect Insurance Rates?

How does inflation affect insurance rates? Inflation impacts everyone, at every level of the economic landscape. It influences the costs of food, products, resources, and services across the board. Everything costs a little more, numerically because the value of each dollar is diluted over time. However, until incomes catch up with rising costs, we all feel the impact of inflation keenly on our budgets.

Inflation also has a profound effect on the cost of insurance. Many Massachusetts residents have recently noticed an increase in their insurance rates. It’s not uncommon to look at your insurance bills with surprise and dismay as inflation continues to rise. This is because insurance is directly affected by the cost of the goods and services required after a disaster.

If you’re wondering why your insurance bill has recently gone up, we’re here to help you understand the connection between inflation and insurance rates – and why insurance costs are likely to continue to rise.

Understanding Inflation and Its Effects on Insurance Rates

Inflation can be defined simultaneously in two ways. Most people view inflation as the rise in the cost of goods and services. From a financial viewpoint, however, inflation is the erosion of the value of a single dollar. Both come out to mean the same thing: Everything costs more than it did before.

Instant. Simple. Smart We Make Insurance Easy

Instant. Simple. Smart
We Make Insurance Easy

Find Out How Much You Can Save Today

Take the first step towards peace of mind with LoPriore’s team. Experience tailored insurance solutions that fit your lifestyle and budget. Get your free, no-obligation quote today and see the difference expertise makes!

Get your Free Quote

Often measured in the cost of a loaf of bread, inflation is when bread increases in price, for example, from $2.50 a loaf to $2.75 a loaf. This rise may seem small, but when multiplied across every item in the grocery store – and everything you pay for through the entire economy, it has quite the impact.

Source: U.S. Bureau of Labor Statistics

Because the buying power of the dollar is so important, inflation affects every aspect of the economy. As a result, inflation has the same effect on insurance rates, which are highly responsive to the market and the cost of things like repairs and emergency services.

Inflation directly affects the operational costs and claim payouts of insurance companies, especially when it comes to property insurance and auto insurance where claims are based heavily on the cost of materials for repairs.

Specific Economic Areas Affected by Inflation

When looking at how inflation has affected insurance rates, it can be helpful to examine how specific costs will have a profound impact on how much clients need when they make an insurance claim. Insurance rates are calculated to achieve a delicate balance, ensuring that the insurance company collects enough premiums each year to cover the costs of claim settlements they will statistically need to provide.

When the cost of parts and repairs increases, the amount of money each client requires per claim will increase, and so too will insurance claims. Certain areas are particularly strongly affected by inflation, and therefore, the cost of related insurance policies must increase in response.

Renovation Costs and Property Insurance

The cost of construction and renovation is on the rise. Costs have been particularly affected by both inflation and global market interruptions. In 2023, the cost of construction increased by 4%. It is predicted to increase by 3-6% during the course of 2024. In truth, inflation is one of several causes of the rise in construction costs. Global market interruption of materials, the shortage of construction professionals, and increasing sustainability requirements are also playing a role. Inflation has then increased this impact by reducing the overall buying power of any construction or renovation budget.

How do rising construction material and labor costs affect home and condo insurance? It all relates to the cost of repair and renovation after a disaster. Fires, floods, and storm damage often require extensive repairs and even rebuilding sections of a house after the damage is done. It may be necessary to remove and rebuild sections of walls that are burned or flooded, replace burst pipes, re-wire old electrical systems after a fire, or rebuild storm-damaged roofs. The type of damage can indicate the likelihood of extensive repairs, which will set a baseline cost for those repairs depending on the cost of materials and labor.

Because costs are going up for renovations after damage occurs, you will require a larger sum for your insurance settlement to cover those repair expenses. Insurance companies must calculate the statistical and potential cost of damage based on the types of coverage your policy includes for home or condo insurance.

Therefore, to help cover that cost, premiums go up so that insurance companies have a deeper cash reserve to cover these rising construction costs.

Vehicle Repair Costs and Auto Insurance

If your car has needed a recent parts replacement, you may have noticed that motor vehicle parts have increased rapidly in price over the last few years. In 2022, the cost of parts for automakers increased by 10%, and the aftermarket price paid by consumers increased by 17%. 2023 saw an increase of over 8% in the price of vehicle parts.

These cost increases are largely the result of international supply chain interruptions. Both global and local car parts manufacturing have been delayed and interrupted shipping lines across the planet have made certain materials and resource supplies more costly to acquire. The rise of inflation and the responding rise in interest rates have also contributed to the overall increased price of cars and vehicle repairs.

As with construction, the cost of labor for vehicle repairs is also on the rise. As fewer young people choose the mechanic profession, the time of those remaining mechanics and vehicle technicians becomes more valuable. Together, these factors have contributed to a significant increase in the cost of vehicle repairs after an accident.

Because the cost of auto parts has also increased for manufacturers, the cost of a new car is also going up. No matter what brand or model you select, prices are rising.

As you might guess, auto insurance rates are closely linked to the cost of repairs and of full vehicle replacement. With the rising cost of both parts and labor, vehicle owners can expect to pay more for repairs after a car accident, which means higher insurance claims and settlements when accidents occur. Insurance companies must make sure they have enough money to pay for the statistical number and severity of accidents for policyholders, which means increasing premiums on auto insurance policies to create deeper cash reserves.

Investment Returns

An interesting aspect of insurance costs that is rarely considered is the possibility of investment returns. Like any financial institute, insurers seek to increase their revenue through investments. They take a portion of the liquid capital (money) provided by premiums and invest it in income-generating accounts. The returns on these investments increase the income of insurance companies and can serve to lower the total amount that customers must pay in premiums to meet the company’s minimum financial reserves for settlement payouts.

Strategies for Consumers to Mitigate the Impact

The good news is that your insurance rates are not set in stone. They are highly responsive to conditions regarding your policy, risk level, and statistically predictable costs if you should ever need to file a claim. There are many ways that a homeowner, condo owner or vehicle owner can take action to minimize the rising cost of insurance and mitigate the impact on your personal budget.

Staying fully insured is an unavoidable priority. You need coverage to ensure the safety of yourself and your property, whether house or car, in case of an emergency. In many cases, as in the state of Massachusetts, full insurance coverage is mandatory under the terms of ownership or lender requirements regarding your home or vehicle loan.  But you don’t have to pay the rising rate offered by your current insurance provider, and you have options to reduce the total insurance premiums you are required to pay each month in the face of inflation and rising costs.

Here are some of our top strategies for minimizing or reducing the cost of your insurance.

Annual Policy Reviews

Closely review your insurance policy or hire a pro to help you analyze the necessity of your coverage.

Package insurance policies are not always perfectly aligned with your needs. Often, insurance providers will put together an offer that includes all the statistically likely risks nationwide. However, your region and the features of your property provide some unique details that may alter your insurance policy needs. For example, you may not need “overland water” insurance if there are no nearby bodies of water or major snow melt-offs in your region. You may not need insurance relating to basements or outbuildings (sheds) if you have neither.

If the number of people in your home changes or if you make home improvements that alter the risk factor of your home’s design, your insurance cost profile may change. Perhaps you installed a security system or removed a shed from your property. If so, you could be paying less for insurance.

The same is true of your vehicle. You may have purchased certain types of coverage initially that are less important now. You might not take road trips anymore and don’t need the level of roadside and repair coverage that you once did. Or you may have installed dash cameras that increase your safety on the road and could decrease your total costs. Using an OBD telematics device could prove you are a careful driver and earn a discount, or taking someone off your insurance after they move out could make a big difference.

It is important to review your insurance policies every year to ensure that the current coverage aligns with your current needs.

Increasing Deductibles

Deductibles are the amount of money you pay before an insurance claim or settlement covers the rest. For example, if your car is damaged in an accident and your deductible is $100, you will pay $100 of the repair costs, and your insurance settlement will cover the rest – up to your coverage limit.

It is called a deductible because the amount is deducted from the total cost of a repair based on the value of the policy.

But you can also think of your deductible as similar to the downpayment on a mortgage. The higher you are willing to put down initially, the lower your monthly payments need to be. This is because the insurance company sees people who pay higher deductibles as less of a financial risk. You are agreeing to pay a larger portion of any eventual pay-out, reducing the amount that the insurance company might lose by covering your next disaster.

In return, you pay less in premiums every month, which can save you thousands of dollars over time. If you never experienced an accident, choosing a higher deductible is pure savings. Just be certain that your deductible is something you can afford and, ideally, have tucked away into savings to ensure that you are prepared for the expenses in the event of a real accident.

Bundling Policies

Another option to reduce the cost of your insurance is through bundling policies. Bundling makes it possible to pay less for insurance by sourcing all of your coverage from just one insurance provider. When you take out multiple policies with a single provider, they will often offer you a “bulk discount” in return for choosing just one company rather than a landscape of insurance providers.

You can sometimes choose to bundle all of the policies you put together with a type of stacking discount based on how many policies you have with one insurance provider under one user account. However, your provider may also offer specific bundles which come with even greater savings opportunities. A classic example of a pre-configured insurance policy bundle is the pairing of home insurance and auto insurance.

Because every person needs both home or condo insurance and car insurance, providers incentivize people to choose them for both purposes through policy bundling deals. Often, all you have to do is open one policy after the other so that they stack and provide a discount.

Another form of policy bundling is to insure all the vehicles in your household under the same insurance provider. For example, if you and your partner drive separate cars, insuring both of them together may provide a bundling opportunity and significant cost savings.

Of course, you’re not limited just to home and auto insurance. Any other insurance you might need can also, usually, be wrapped up into a bundle and insured altogether at a lower cost than maintaining individual policies.

Good Credit Score

Because insurance is about judging risk, having a good credit score can also influence your insurance rates. While not directly related, a person’s responsibility with money can indicate that they are a careful person who is also less likely to experience an accident at home or on the road.

Improving your credit score first requires understanding what a credit score truly is. It is used to represent your financial responsibility, but really it’s a measure of how well you handle credit and debt in particular. If you’ve never handled a credit card or taken out a loan, you don’t have a credit score,  no matter how financially responsible you may be with debit and cash.

Fortunately, this also makes it easier to improve your credit score in a fairly short amount of time. In addition to paying off debts and keeping your credit/loan accounts in good standing, there are a few tricks that can accelerate your credit score growth.

Important notes to take:

• First, open a cash rewards credit card with good terms and use it for groceries. Then pay off the card in full every month. This will create a steady and long-standing history of credit card use followed by responsible payments. Let the balance ride for one month a year to build up a small amount of interest, then repeat the process for years to build a long and stable credit history.
• Second, take out practical installation loans and pay them off. Buy a car and automate your car loan payments. Take out a small personal loan and pay it back quickly. Both reliable loan installation payments and rapidly completing non-installation loans will create details on your credit report that will raise your credit score due to the responsible handling of loans.
• Third, get a card from your favorite retailer. Use it occasionally with normal shopping and pay it off immediately. This will add to your credit diversity, along with your regular card and installment loan, to strengthen your credit report and help to further increase your credit score.

Having a high credit score will decrease your insurance rates. This is because the tasks necessary to maintain a high credit score tend to indicate a stable, responsible person who does not take unnecessary risks. This type of person is statistically less likely to be involved in accidents that result in costly insurance claims. Therefore, higher credit scores result in lower insurance premiums.

Risk Mitigation Measures

Insurance costs are primarily based on the amount of risk that your policy represents to the insurance provider. Insurance companies rely on statistics, and you can play that to your advantage by decreasing the statistical likelihood that your home or vehicle will experience a disaster. There are a number of improvements you can make that can increase safety and decrease risk that will, in turn, potentially lower the cost of your home and auto insurance as a result.

Reducing Risk at Home

• Install a Security System – Minimize the risk associated with break-ins by installing security cameras, intruder detection, and a monitoring system that alerts you when intruder signals are detected.
• Maintain Smoke Detectors – A home with working smoke detectors in every room is far less likely to cause extensive fire damage. Installing and maintaining smoke detectors can make a difference.
• Upgrade Your Door Locks – Upgrade your home’s exterior door security by installing a deadbolt, security plate, chain, and other features that can effectively keep intruders outdoors, even if they would prefer to force their way in.
• Install a Leak Detection System – You can reduce the risk of flooding and water damage by installing a leak detection system. This combines flow monitoring in your pipes and sensors placed underneath plumbed-in appliances (like the dishwasher and clothes washer) to detect if water is escaping where it shouldn’t.
• Update Your Roof and HVAC – new roofs and new HVAC systems pose less of a potential disaster for insurance providers. Recent updates to either can improve your insurance pricing.
• Install Reinforced Features – Impact windows, sturdy exterior doors, hurricane straps on the roof – these features can reduce the risk to your home from both storm damage and intruders.

Reducing Risk for Your Vehicle

• Install Dash Cams – Dash cams protect the driver from being found ‘at fault’ when other cars are driving recklessly, thus drastically reducing your risk when it comes to auto insurance coverage.
• Take the Telematics Test – Insurance providers can use an OBD II device plugged into your car to detect if you are a safe driver. If you drive gently and carefully, you can save on costs using the insurer’s Telematics Safe Driving program.
• Drive Less – Reduce the frequency and distance of your driving and participate in low-mileage driving programs.
• Take a Safe Driving Course – Enroll in a safe driving course for a boost to your car insurance credibility and lower premiums.
• Choose Low-Key Cars – Choose cars that have good reviews and are not flashy. Flashy cars are more expensive to insure.
• Reduce Other Driver Risks – Work with other drivers in your household to reduce their personal risk profiles. Teen drivers should get good grades and adult drivers should work on their own credit scores.

By making just a few of these improvements, you can re-negotiate your insurance for lower rates due to your overall lower risk profile.

Insurance Rises with Inflation, but You Have Options

Inflation has a profound impact on insurance because of what insurance should provide. Insurance is calculated to cover the costs of repairs to your home or vehicle. If the cost of repairs rises, so too must insurance coverage and the cost to maintain it. Fortunately, there are other ways to lower your insurance rates and keep them low through personal credibility and safety measures. Contact your insurance agent for a policy review. You also have to discuss ways to improve your coverage and deductibles and reduce your risk profile for lower insurance costs in light of recent inflation.

Inflation Frequently Asked Questions

1. Why are my insurance rates going up?

Your insurance rates are increasing primarily due to inflation, which affects the cost of goods and services, including materials and labor for repairs and replacements covered by insurance. As these costs rise, insurance companies adjust premiums to ensure they can cover the increasing cost of claims.

2. How does inflation specifically impact auto and home insurance rates?

Inflation impacts auto and home insurance rates by increasing the cost of vehicle repairs, construction, and renovation. For auto insurance, the price of auto parts and labor for repairs has gone up due to supply chain interruptions and inflation. For home and condo insurance, the cost of construction materials and labor has risen, affecting the cost of repairs and renovations after disasters.

3. Can I do anything to mitigate the impact of rising insurance costs?

Yes, you can take several actions to mitigate the impact of rising insurance costs. Reviewing your insurance policies annually, increasing your deductibles, and bundling policies can help lower your premiums. Additionally, improving your credit score and implementing risk mitigation measures at home and for your vehicle can also lead to lower insurance costs.

4. How does having a good credit score affect my insurance rates?

A good credit score can lead to lower insurance rates because it is often seen as an indicator of financial responsibility. Insurance companies consider individuals with higher credit scores as lower risks, statistically less likely to file claims, and thus offer them lower premiums.

5. What are some risk mitigation measures I can take to lower my home and auto insurance costs?

For home insurance, installing security systems, maintaining smoke detectors, updating your roof and HVAC, and installing leak detection systems can lower your risk profile and insurance costs. For auto insurance, installing dash cams, participating in telematics safe driving programs, driving less, and taking safe driving courses can help reduce your premiums by demonstrating lower risk behavior.