What is the connection between inflation and insurance risk?

In April 2022, the British Chambers of Commerce quarterly economic study found that 70% of construction firms and 72% of transportation and distribution firms were expecting to increase their prices over the coming three months.

In the UK, the Office of National Statistics (ONS) shows overall costs for basic metals and fabricated products were up 24.2% in the 12 months to March 2022 . According to the US Bureau of Labor Statistics (BLS) , iron and steel costs were up 36% in the 12 months to March 2022.

Metal prices are projected by the World Bank to increase by about 16% in 2022 relative to 2021 and ease somewhat in 2023, while remaining at historically elevated levels. Nickel and aluminium prices are expected to increase by 52% and 38% respectively. 

These levels of inflation means there is a chronic risk that existing declared values are too low or will quickly get out of date.

Not only does this mean that ‘Day One’ declarations should reflect current costs but the loading factors for future cost movements (policy year and reinstatement period), and the sums allowed for demolition and debris removal, need close monitoring.

Policyholders ought to conduct careful analysis to arrive at accurate reinstatement costs, particularly when considering declared values for property damage insurance policies. It is vital to reflect the appropriate cost movements if updating previous declared values or historic costs.

If a formal independent assessment has not been carried out in recent history – three years being the recommended period between assessment points – then a review of values would be wise.

Inflation and insurance risk are here to stay it would appear. The temptation, to rely upon a previous assessment or internal estimate and just to index this for several years, could leave policyholders critically exposed. Access our full whitepaper here.

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