Is Inflation Affecting Your Insurance Costs?

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  • The higher cost of labor and materials drives insurance premiums up.
  • The lack of new car inventory makes it more difficult and expensive for insurers to replace totaled vehicles.
  • Climate change has led to more historical storms and severe weather events.

As the government works to control inflation, insurance companies are forced to raise their prices.

You're not alone if you've recently received notification that your homeowners or auto insurance rate has increased. A series of disastrous events is at the heart of why rates are rising across the board. Where you live will inform how much your rates increase; however, analysts predict a jump ranging from high single-digit to low double-digit percentages.

Following the worst of the pandemic, many of us wondered if big business used the emergency to keep prices artificially high and make their stockholders happy. And after Russia invaded Ukraine and gas prices shot up, some wondered if gas stations added to the problem by price gouging.

It's difficult to level the same accusations at insurance companies. While there are many reasons to expect rates to continue to rise, here are the top three explanations -- and each represents situations over which insurance companies exert no control.

1. Climate change

According to scientists, climate change has led to a rise in extreme climate events. Simply put, the U.S. (along with the rest of the globe) is recording a greater number of historic storms and severe weather events. That means more claims for flooding, roof damage, falling trees, and even auto accidents.

A look at the numbers tells the story. Between 1980 and 2021, the U.S. had an annual average of 7.7 disastrous weather events. By 2021, that number had jumped to 20 events. For decades, scientists, have warned that climate change will severely impact weather patterns, and we see that prediction playing out before our eyes.

Each wildfire, hurricane, and severe storm leads to insurance claims. Insurance companies can't pay for those losses without bumping up the cost of protection.

2. High cost of labor and materials

This is not the first time the U.S. has faced inflationary concerns, and it won't be the last. However, there's something different happening this time around. As climate change and COVID-19 battered the world, supply chains broke down, shipping lanes backed up, and the materials we counted on to make home repairs and build new vehicles were nonexistent or stuck offshore.

At the same time, more than 1 million American deaths from COVID-19 led to a great awakening of sorts among American workers. Those months in lockdown resulted in people asking themselves if they wanted to go back to the lives they led before the pandemic or whether now was the time to quit their jobs and do something new.

All that self-reflection resulted in more people reinventing their lives and fewer reentering the workforce as laborers. Businesses found themselves paying more to attract labor, and that pay increase was passed on to the consumer.

Today, if your house burns down or your car is damaged in an accident, it's more expensive to pay for the labor and materials needed to make repairs. Everything we once counted on, from lumber to computer chips, is in short supply. When supply is available, it's not enough to meet demand.

Those lucky enough to have access to what they need are paying far more than they might have spent a few years earlier. Still, the cost increases impact your auto and home insurance company's ability to fully cover repairs.

3. Continued lack of inventory

In August, President Biden signed into law the CHIPS and Science Act. The law sets aside $52 billion in tax credits for American chipmakers to expand production here in the U.S. While it may take years to upgrade existing manufacturing sites and build new foundries, we will eventually not have to depend on other countries to supply us with technology we originally invented.

A full one-third of inflation costs last year can be traced to the high price of automobiles. And the high cost of cars can be traced to meager inventory, due to manufacturers' inability to buy microchips. Let's say you hit a patch of ice and total your car in a wreck. It will be far more difficult for your insurance company to replace that car soon. And when they do, they will pay more for the new vehicle.

The bad news is that insurance rates are on the rise. The good news is, there are steps you can take to keep your insurance rates down.

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