Broker Check

Inflation and Underinsurance

May 27, 2022

Inflation is now at a rate of over 8% annually, the highest in 40 years. COVID-19 caused supply bottlenecks, and the Russia-Ukraine war has made shortages worse. The result is higher prices for a wide range of products. In addition, labor shortages cause wage increases.

Inflation creates a widening gap between accounting valuations and replacement cost. If insured values are based on outdated information and have not been revised year to year, your organization is now underinsured, perhaps significantly so.

Some Property insurance policies are written with an "inflation guard" providing automatic increases. If so, limits should still be reviewed for adequacy. Generally speaking, building and personal property values should be reappraised every few years. 

Business interruption has additional challenges. In addition to recalculating lost profits and continuing costs, organizations must assess whether supply chain bottlenecks and/or shortages will delay restoration beyond the time contemplated in the policy. If a period of restoration is 180 days it may need to be extended to 365 days. 12 months may need to be 24.

For liability claims there is another kind of inflation - social inflation. Because of large jury verdicts, limits of $1,000,000 each occurrence/$2,000,000 aggregate should be supplemented by excess or umbrella insurance with limits of $5,000,000 or more if affordable. Deductibles can be used to reduce premiums.

When preparing for your next renewal, be sure to discuss increasing policy limits and reviewing terms with your broker or adviser.