06 Feb 2024

Understanding insurance inflation: The real reason that premiums have risen

Inflation has taken the world by storm over the past two years, leaving consumers and central banks feeling the pinch. But like most other goods and services, inflation can also increase the cost of insurance. Norton Insurance Brokers delve into the factors that have affected inflation and thus influenced insurance premiums, in addition to how you can protect your assets against inflation.

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Inflation has taken the world by storm over the past two years, leaving consumers and central banks feeling the pinch. But like most other goods and services, inflation can also increase the cost of insurance.

In this article, we will delve into the factors that have affected inflation and thus influenced insurance premiums, in addition to how you can protect your assets against inflation.

The key thing to remember is: as inflation rises, so do insurance premiums.

In recent times, many consumers have noticed that their insurance premiums are going up. This rise can be attributed to increasing inflation, which has led to growing costs for insurance companies. With repair costs and claim amounts soaring, it means the insurers have no choice but to up their premiums to keep pace.

The Consumer Price Index (CPI) is the official measure of inflation in consumer prices in the UK. In 2022, this jumped to over 10 per cent in 2022 – the highest level in 40 years – and it stood at 6.3 per cent as of October 2023, according to the Office for National Statistics. Inflation levels have gone through the roof, there’s no denying that, but it’s promising to see the figure easing with grocery inflation back in single digits for the first time in 16 months.

The UK home insurance market experienced the worst performing year on record in 2022 for insurers, with supply chain difficulties driving up construction and transportation costs for damaged homes. This makes rebuilds much more costly, and the frequency and severity of major weather events only drives up claim costs for insurers, therefore home insurance premiums are affected and go up.

 

How inflation levels have been affected:

  1. Global supply chain chaos: The pandemic upended global supply chains through factory shutdowns, labour shortages and transportation issues. This constrained the supply of goods when demand rebounded as economies reopened.
  2. Labour shortages driving up wages: Layoffs and staff shortages during the Covid-19 pandemic have led to a tight labour market in the UK across many sectors. Businesses have been forced to raise wages to retain and attract staff. As worker pay increases, this is passed on to customers via higher prices, adding to the inflationary mix.
  3. Currency depreciation takes a hit: Fluctuations in the exchange rate has impacted the prices of imported goods and services from abroad, thus influencing the overall level of inflation.

The bottom line is that costs are way up for businesses in general, and these costs are being passed onto consumers. As the general cost of goods and services goes up, so does the cost for insurers to settle claims, which then gets passed on to consumers through higher premiums.

 

What you can do to protect your assets

In the midst of inflation, the worth of your personal treasures – be it luxury watches, fine art or antique jewellery – can rise in value without you realising it. This would leave you underinsured if anything bad happened to your assets.

Our advice to you: reassess the value of your assets.

Your home that you bought five years ago and your luxury watch might be worth more now, so don’t get caught underinsured when the storm hits.

By re-evaluating the value of your assets with Norton, such as your home and contents insurance, we can ensure you are protected against any risks such as floods or burglary.

Insurance is there for the maybes that can sometimes become realities, and for that reason we’ve chosen insurers who are known for a fantastic claims experience and will take care of you if something does go wrong.

Mark Wilkinson, managing director at Norton Insurance Brokers said: “The surge in insurance premiums is shaped by multiple factors. Undoubtedly, the impact of inflation has rippled through every aspect of our lives, including insurance premiums.

“One thing to remember when shopping around for your next insurance policy is to make sure you don’t fall victim to underinsurance. We advise ensuring you get all the necessary cover you need in your policy, and your assets are accurately valued in the event of damage or theft.”

Now, let’s take a look at an example of home insurance inflation.

 

Insurance inflation example: Home and contents insurance

Jonathan is a 45-year-old homeowner living in Brighton. He owns a three-bedroom house close to the beach which he purchased for £250,000 in 2017.

He owns the following assets:

- A luxury Rolex watch, bought for £6,000 in 2013.

- A rare fine art collection passed down through generations, worth £25,000 in 2017.

Historically, he has not taken interest in reviewing and adjusting his insurance policy, but after hearing about the general inflationary pressures in the home market, he now decides to get the level of cover that he needs at Norton Insurance Brokers.

He understands that the main reasons for his premium increasing is because of inflation, but he also has concerns over potential flooding as he lives so close to the sea.

Although Jonathan’s premium has gone up, he has complete peace of mind knowing that his prized possessions are now appropriately covered even though inflation affected his home insurance premium.

 

Would you like to speak to somebody about your insurance needs?

For more information about Norton Insurance Brokers or to speak to them about your insurance needs, please visit https://www.nortonib.co.uk or call them on 0121 248 9440.