In view of recent cost trends, both insureds and insurers need to take action now to make sure properties are appropriately valued moving forward.
Published on November 3, 2022
by Diane Scott, Executive Claims Specialist, Property Claims, and Patrick Hall, Director, Property Claims
Recent economic inflation has created new challenges for insureds. One major area of concern is property insurance. Multiple factors are driving up repair costs and/or replacement costs, threatening to leave property owners underinsured. Repair times are also being affected.
While insurance companies are working to stay abreast of these issues and to hold down the resulting costs to the best of their abilities, there are also specific steps that insureds—and the brokers who represent them—can and should be taking to prevent unpleasant surprises when damages do occur.
Why claims costs and times are rising
First of all, as society emerges from the COVID-19 pandemic, the insurance industry is faced with record increases in property claim costs, combined with increases in the time required to resolve claims. Contributing factors include:
- supply chain issues that are a direct result of the pandemic;
- increases in material costs; and
- delays (often lengthy) related to the availability of labor.
“Industry experts predict that global supply chain disruptions will continue at least through the second half of 2023.”
The global supply chain is of course a complex entity. It consists of interrelated industries—manufacturing, transportation and logistics—that create and move component parts and finished products from their points of production to end consumers. Global and local supply chains can easily be affected by natural disasters, transportation failures, geopolitical instability, price hikes, and cyberattacks.
Industry experts frequently attribute these disruptions to such factors as renewed viral outbreaks; China’s strict zero-COVID-19 policy, which is resulting in renewed shutdowns; and trade volatility that is expected to persist into the Lunar New Year. Experts predict that global supply chain disruptions will continue at least through the second half of 2023.1
In addition, consideration must be made for non-loss related external factors, including—especially in the current economic environment—the impact of inflation.
“Claims will be increasingly impacted by inflation and supply chain issues.” – Mike Castillo, Meaden & Moore
The US Federal Reserve defines inflation as the increase in the prices of goods and services over time. One of the main ways inflation is measured is through a tool called the Consumer Price Index (CPI). The CPI is a measure of the average change over time in prices paid by consumers for a basket of goods and services. In June 2022, the increase in the CPI for the last 12 months reached 9.1 percent overall, the largest increase in 40 years.2
Impacts on construction and repair supply costs have been even more pronounced. As a report by Gallagher noted, the Insurance Times (UK) reported in October 2021 that imported sawn or planed wood saw a 74 percent price rise, while fabricated structural steel experienced a 73 percent increase in costs. In addition, according to builders who were quoted by the BBC, bricks were taking over six months to arrive. Labor shortages in the construction industry were also contributing to longer repair times: At that time, the UK’s Office of National Statistics was quoted as stating there were 33,000 construction jobs available.3
Additionally, the price of fuel has increased dramatically over the last year. Contractors use fuel to run their trucks and equipment, and fuel is also a factor in the shipping or delivery of materials and the hauling away of debris and equipment. Although pricing has fluctuated, the national average of fuel as of July 2022 was $4.52/gallon, or $1.36/gallon more than one year before.4
Softwood lumber prices have jumped 124 percent since last August, according to Fortune magazine. In November 2021, the US Commerce Department increased tariffs on Canadian lumber from 9 percent to 18 percent, making it much more costly to import.5 In addition, the 25 percent tariff on steel and 10 percent tariff on aluminum imposed by President Trump have so far largely been left in place by President Biden.
The added challenge of supply chain delays
Mike Castillo, a CPA specializing in forensic accounting with Meaden & Moore, anticipates that claims will be increasingly impacted by inflation and supply chain issues. Some examples Castillo has observed include a supply chain issue impacting the availability of semi-conductor chips, which in turn has delayed the resolution of auto damage claims. Additionally, he notes that Texas freeze claims from 2021’s Winter Storm Uri are still being impacted by the supply chain for plastics and resins, which includes packaging as well as plumbing materials.
Changes to the labor market are also contributing to increased costs and delays. The US construction industry lost 1.1 million employees from February to April 2020, according to the EEOC testimony of Ken Simonson, the chief economist of the Associated Contractors of America. Thousands of experienced workers in residential construction found jobs in other sectors or left the workforce entirely.6
Many members of the current workforce are reluctant to do manual labor, contributing to a shortage of workers in the construction sector. To retain their current pool of workers, contractors have taken new, creative steps, including four-day work weeks and worker bonuses. However, those measures in turn increase costs and create delays.
There is also a shortage of building inspectors, which impacts the number of permits being issued, and creates a backlog of inspections and subsequent delays in construction completion.
John Chianese, an executive general adjuster at Sedgwick, says, “Contractors are not currently starving: Many left the business during COVID or were forced out. Contractors still in operation can pick and choose jobs based on who is paying more. But, there are fewer [firms] to actually do the jobs [creating a shortage of qualified tradesmen].”
“Insurers, brokers, and insureds alike have a shared interest in making sure that property is insured to value.”
A discussion with a building consultant based in Austin, Texas, revealed that contractors are often treating the current inflationary climate as the basis for pricing negotiation. As an example, he indicated a claim dating from Hurricane Laura (2020) was still ongoing, with the current issue being the pricing of roofing material due to supply chain issues. He pointed out demand on materials continues to shift due to the frequency of hurricanes and hail. One month, he said, it could be a supply chain issue with asphalt shingles, while the following month could see similar issues related to insulation board.
Increased costs are also creating challenges for underwriting. Inflation in the US is making accurate property valuations difficult and contributing to higher claims costs, both of which make underwriting pricing more challenging. Rising property values are leading to increased insurance premiums, even if underlying rates remain flat. Underwriters who might in the past have routinely accepted the building valuations reported to them are now facing the task of closely scrutinizing property values to assure more accurate pricing.
What can insurers do?
In attempting to get a better handle on the underlying economic drivers of inflation risks and supply chain issues, insurers are increasingly taking a number of operational steps:
- performing comprehensive enterprise claims inflation modelling to obtain relevant data;
- accelerating digital transformation strategies, including expansion of vendor networks and partnerships;
- applying intelligent workflows and automating underwriting tasks;
- exploiting technology to operate more efficiently; and
- working to more accurately assess risks.
What can insureds do?
While these steps by insurers are necessary, however, they are not by themselves sufficient to hold down the risks of underinsurance in the current inflationary climate.
Insurers, brokers, and insureds alike have a shared interest in making sure that property is insured to value—in other words, that the coverage amount in each case reflects the current value of the property, including the likely cost of repairs.
For this reason, it is absolutely critical that property owners contact their agent or broker and make sure that the value of their coverage does in fact reflect the latest cost factors. Brokers typically have technology tools available to them that can make a real difference in properly assessing the current replacement value of a property. In addition, there may be the option to purchase a policy that has a built-in inflation guard, which will provide for inflation, at least up to a specified percentage.
Exploring these options starts with having an accurate sense of the actual value of an insured entity. Relying on past values and past premiums for guidance is no longer a viable path forward. Instead, consultation with qualified insurance professionals is a wise first step.
1 "Global supply chain disruption to continue into 2023," Marcus Hand, Sea Trade Maritime News, April 12, 2022. seatrade-maritime.com/supply-chain-and-logistics/global-supply-chain-disruption-continue-2023
2 “The Economics Daily,” US Bureau of Labor Statistics, July 18, 2022. bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm#:~:text=Over%20the%2012%20months%20ended,Urban%20Consumers%20increased%209.1%20percent
3 Gallagher, “News & Insights,” January 18, 2022. ajg.com/uk/news-and-insights/2022/january/impact-of-supply-chain-issues/
4 “Summertime swoon? Pump prices fall again,” AAA, July 18, 2022. gasprices.aaa.com/summertime-swoon-pump-prices-fall-again/
5 “Lumber prices—which warned us about inflation over a year ago—are again trying to tell us something,” Tristan Bove, Fortune, July 9, 2022. fortune.com/2022/07/09/lumber-price-bubble-housing-market-has-inflation-peaked
6 Meeting of May 17, 2022, US Equal Employment Opportunity Commission. eeoc.gov/meetings/meeting-may-17-2022-knocking-down-walls-discrimination-and-harassment-construction