Understanding the Effects of Inflation in 2023 and How Insurers Can Stay Ahead

Inflation impacts all industries, including insurance. Although, the challenges can be disproportionate depending on the business. Insurance often remains resilient during economic crises because it isn’t an ancillary expense. But that doesn’t exempt agencies from feeling the adverse effects of inflation.

Companies must be aware of how inflation impacts the insurance industry and develop careful strategies to prepare for the future of the insurance market. For instance, insurance agencies are facing increasing costs due to interest rate hikes. Mortgage rate changes, supply chain disruptions, and other major market disruptions will also have an impact.

To offset these costs, insurers typically raise premiums and reduce the value of investments held. However, various other strategies like risk assessment, data management, and digitization can help you thrive in the face of inflation.

The Effects of Inflation in 2023: Drivers, Trends, and Projections

Experts expect inflation to rise significantly in 2023. The effects of inflation could pose both challenges and opportunities for the insurance industry, so it’s essential to investigate potential risks.

State of the Market

Inflation is one of the more complex economic features, and trends in inflation can be challenging to predict. Several factors drive inflation, including:

• Global events
• International market prices
• Higher interest rates
• Labor market conditions

What’s more, ongoing strain from the Ukraine conflict has created sharp spikes in global fuel, raw resources, and food prices. Interest rates have also been increasing, further slowing the economy and lessening consumer spending.

The Federal Reserve has attempted to reduce inflation, but financial markets have remained unchanged. The economy continues to see market distortions, pent-up demand, energy prices, and tighter monetary policies. So, inflation will likely remain historically high, though less volatile than what we saw in 2022 and early 2023

Effects of Inflation on Insurance Companies

Inflation and a tumultuous market can strain some insurance providers more than others. Market prices are high, prompting consumers to seek the best deal rather than simply evaluating product prices. The return on investment (ROI) for life insurance might seem low. But if there are other benefits in life insurance plans, consumers may be more likely to purchase them.

What’s more, some factors can limit the opportunities you can provide your customers. For one, price and interest rate hikes might deter consumers from seeking specific types of insurance, or making a trade-off decision between coverage and price. A slow housing market may reduce interest in homeowner’s insurance. And while consumers shop around, interest rates, resource availability, and labor market conditions can increase labor costs and operational budgets.

Managing the Effects of Inflation and Its Risks

Proactive strategies can help companies mitigate the numerous risks posed by inflation and thrive in an inflationary environment. Premium pricing, policy repackaging, and diversification are three tools that can help you stay on track.

Premiums

In response to the market, insurance companies have raised premiums; however, that has been met with a tremendous amount of churn and complaints so far in 2023. Even loyal customers have been reluctant to tolerate inflated prices and begin to shop their insurance again.

In the long run, claim costs will decrease as inflation eases up. So, increased premiums are typically a short-term or emergency strategy.

Policy Packaging

Consider repackaging policies based on higher expenses and claim costs. For instance, property and casualty insurers experience complications with solvency. Prior losses, both known and unknown, compound the risks associated with liabilities. Although insurance companies carry reserves, the amount reserved for these losses might need to be revised as future prices rise.

In an inflationary environment, the increased length of payouts and uncertainty over future claims can exacerbate these effects of inflation. To protect themselves, insurers can increase the length of time policies are in effect, raise the deductible amount a customer must pay before coverage begins, and reduce benefits or exclude specific perils from policies.

Reduce Operating Costs through Automation

Controlling operating costs may be one of the things a carrier can control that can impact the bottom line. Servicing a policy, to satisfy mortgage loan requirements, for example, is a pure cost center that can and should be automated, yet thousands of calls requesting updated proof of insurance are still being manually responded to each day.

Innovate, Adapt, Overcome: Opportunities for Insurers in an Inflationary Environment

Modernizing and digitalizing distribution platforms can create innovative value propositions.

Innovation maintains your standard operations and allows for growth even when the effects of inflation are in full swing. So, to remain competitive, insurance companies must innovate, adapt, and overcome challenges by leveraging technology to meet customer needs.

Technology trends can significantly alter insurance products and core functions. Think automated warehouses and artificial intelligence (AI)-enabled distributed infrastructure. This compounding effect could transform how insurers use data to develop predictive insights and inform policyholders. Specifically, streamlining processes can reduce labor costs and ensure customers get the best value possible. Optimizing user interfaces can reduce long-term costs, improve customer experiences, and improve data collection.

Quality risk management begins with cutting-edge data management. Trusted architecture and applied AI can give companies insight, conduct maintenance, or enact change before problems strike.

Capturing Better Market Share by Addressing Inflation-Related Concerns

Society’s most vulnerable are being priced out of basic needs. Inflation has organically created a cost-of-living crisis. As a result, insurance companies are transforming their business plans to mitigate the direct impacts of inflation.

Insurance companies can increase their market share by investing in innovations aimed directly at consumer needs. This includes providing policies protected from inflation, encouraging openness and communication, and using technology to provide better value. Additionally, tactical partnerships and financial investments can ease increased inflation-related costs.

Insurers are investing in claims automation and partnerships with other companies to combat future supply chain disruptions and social inflation. At the product-design level, they can innovate and offer less-expensive products focused on risk and loss prevention. Digitalization is key to improving cost efficiency and employee productivity.

Thriving Through the Effects of Inflation

Inflation offers our agencies two options. We can struggle with the negative impacts, or we can uncover innovative strategies to rise above recurring waves of inflation. With an appropriate strategy, you can make inflation work for your company.

When developing strategies and new products, consider the future landscape of the insurance market—including inflation and the benefits of digitalization. Canopy Connect can help insurance carriers reduce their servicing costs and offer your clients a more streamlined and intuitive digital experience. Explore all our services today.