How property insurers can stay ahead of soaring inflation
For insurers in a time of extreme unpredictability, having accurate, reliable monthly pricing is a must.
Whether it’s groceries or gas, American consumers are finding that the things they need are a little more expensive these days.
Inflation rates are at their highest in 40 years. Data from the U.S. Bureau of Labor Statistics showed the current inflation rate in March 2022 to be 8.5% in March, the most extreme year-over-year increase since January 1982, according to reporting from The Associated Press.
Overall reconstruction costs, including building materials and labor costs, have risen 13.5% since April 2021. For insurers in a time of extreme unpredictability, having accurate, reliable monthly pricing is a must.
A number of experts are warning that prices may not be dropping anytime soon. With ports and warehouses still reportedly backed up with months of unfilled orders, along with the effects of production shortages from factory shutdowns, geopolitical strife, inflation and general market volatility, it seems that most everything from food to cars has risen in price.
In response to this, the Federal Reserve announced its first interest rate hike since 2018, with the reported goal of promoting maximum employment, keeping prices stable and ensuring moderate long-term interest rates.
Meanwhile, insurers are trying to forge on in a time of extreme market volatility. They are looking for critical tools to help them navigate the market with additional precision. That means having access to detailed, regularly updated cost data.
Fuel prices soar — with far-reaching effects.
Fuel prices are reaching record highs driven, in part, by international sanctions and oil production slowdowns during the pandemic.
Only 60% of global fuel consumption is in the form of fuel for vehicles, with the other 40% going into the hundreds of products that rely on fuel as an ingredient. The oil industry touches a significant number of products Americans use every day, many of them core to the business of reconstruction.
Fuel is a primary ingredient in asphalt shingles, and if fuel prices continue to rise, shingle prices may rise as well. But that’s not the only building material that will be affected. Fuel is also an ingredient in:
- Furniture, carpets, insulation, paint;
- Tires, Plastic parts and containers, plywood; and
- Adhesives, epoxies, paint and ink.
These rising oil increases can also impact overhead and labor costs. As the cost of fuel rises, traveling to jobs can become a pricey proposition, requiring contractors to increase labor costs or incorporate a fuel surcharge. Labor costs have risen accordingly, increasing 10.4% from April 2021.
Right now, the demand for new buildings, renovations of existing buildings and other reconstruction projects are at a high. After two years of spending an unprecedented amount of time at home, many owners looked to reinvest in their properties. That may have involved installing new solar panels, renovating a bathroom or building a pool.
But from drywall finishers to roofers, cost increases for labor have increased around 12%. If you wanted to hire a roofer, you might find that the cost had gone up 12.6%, and if it was an electrician you wanted, you might find that the cost had gone up 8.5%. Overall, the cost to rebuild a property today is at least 7.14% higher than it was last quarter.
The current frenzy for lumber and interior trim
Since April 2021, material costs have risen 16.5%, and the individual costs of drywall, paint, lumber and carpet all continue to soar. Lumber prices in particular have been on a rocky roller coaster ride the past few years, rising and dipping in ways that were difficult to predict. In 2021, the cost of lumber took a precipitous dip, but has since more than recovered, rising to nearly 30%.
While the reason for this volatility is not entirely clear, with some chalking the issue up to supply chain bottlenecks, along with strong demand fueled by panicked purchasing, the future of lumber costs remains in flux. These volatile market conditions make ongoing access to accurate monthly pricing a necessity.
What insurance pros need to know to stay ahead
In today’s turbulent marketplace, insurers need all the information they can get to accurately price policies to support insurance-to-value and help protect policyholders. That means having access to current, highly refined monthly pricing, based on historical claims and research with contactors out in the field.
Access to these frequent pricing updates can flatten the curve of price spikes, that can help make these sudden market shifts less jarring for insurers quoting policies and property owners applying for insurance. While costs may continue to soar, monthly pricing updates help insurers stay on top of a rapidly shifting market.
Trish Hopkinson is product director, 360Value personal lines, for Verisk. You can reach Trish at thopkinson@verisk.com. Joel Teemant is product director, 360Value commercial lines, for Verisk. He can be reached at jteemant@verisk.com. Any opinions expressed here are the authors’ own.
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