Why Inflation Is Increasing Total Cost of Risk and What Risk Managers Can Do

Almost all sectors of the economy have felt the effects of inflation.  

Prices have increased for various goods and services over the past few years, peaking at a 9.1 percent inflation rate in June of 2022. Pandemic product shortages, temporary factory closures, supply chain issues, and other factors all contributed to a rise in the price of goods.   

Though the inflation rate has since decreased, the rate remains high, even as the Federal Reserve has made an effort to rein in increases by raising interest rates. Officials expect inflation to remain high but will slow through 2024, the New York Times reported.  

For risk professionals, increased inflation can mean it will cost their business more to recover from an insured event. In some cases, these rising costs could create gaps between an insured’s policy limit and the amount of insurance coverage they’ve purchased; In others, risk professionals may see rate increases on their companies’ policies, driven by the fact that rising prices are increasing claims costs for insurers.  

To help combat the effects inflation could have on their businesses, risk managers will want to ensure that they are receiving accurate replacement cost data, so their properties are adequately protected.  

Risk managers should also analyze their company’s Total Cost of Risk (TCOR) and identify opportunities to introduce risk mitigation measures that can help save money and decrease claims costs well in the future.  

How Inflation Is Increasing The Cost of Risk

One area where inflation is impacting risk spend is in claims costs. If an insured event occurs, it can cost more for a company to recover due to price increases driven by inflation, supply chain issues, and other factors. McKinsey found that inflation increased losses by $30 billion between 2021 and 2022. Medical and wage inflation could increase the cost of a workers’ compensation claim. High building material costs could contribute to increased costs for property claims.  

Though inflation can affect a number of commercial insurance lines, the property and casualty segment, in particular, has been affected by materials price increases and their impacts on claims costs.  

Take a look at how rising prices are affecting the cost to recover from property damage caused by a natural catastrophe, for instance. If a weather event damages a building, it can cost more to rebuild because inflation has driven up the prices of construction materials like lumber and paint, amongst other supplies as well as increased labor costs.  

If the cost of rebuilding is higher than what a company has valued the property, they may be left with a gap in coverage. In some cases, businesses may have to pay out of pocket for the costs left uncovered by the policy.  

If claims costs remain high, insurers will likely pass those costs onto businesses through higher premiums and potentially reduced coverages at renewal time. Either way, risk professionals will soon feel the financial impacts of inflation on their businesses.   

How Risk Managers Can Combat Today’s Inflationary Environment  

With inflation driving up recovery and insurance costs, risk professionals need to analyze their programs to see whether they have adequate limits so that they can understand what they need to do to prevent costly losses.  

Risk professionals might work with their teams to assess their property valuations, electing to insure at or above replacement cost as well as add coverage if they find persistent gaps. Ensuring that all their insurable values are accurate can help reduce underinsurance risk — something risk managers will want to avoid in today’s inflationary environment.  

Risk managers should evaluate business interruption, ordinances, or laws, and increase construction cost coverage on their property programs to minimize the financial impact of supply chain delays.  

In addition, risk managers should consider looking at areas where they’ve experienced repetitive losses and invest in tools that can help mitigate those losses so they don’t have to worry about the potential for increased claims costs.  

Introducing new risk mitigation strategies can also reduce premium costs, helping companies tackle inflation before a potential claim occurs.  

In order to assess potential areas where companies can limit the effects of inflation on insurance spend, companies will want to assess their TCOR. TCOR is a metric that encompasses all of a company’s risk management expenditures, including risk management administration costs, insurance premiums paid, retained losses, and self-insured retentions.  

By analyzing an organization’s TCOR, industry professionals can assess what aspects of their policies they may need to purchase increased coverage for and which they can address through risk mitigation techniques. Once risk managers understand which path makes the most sense for their company, they can pitch these changes to the C-suite and proactively address the risks posed by inflation.  

LineSlip Can Help Risk Managers Understand their Total Cost of Risk and Get Accurate Replacement Costs Data for their Properties

During this inflationary period, risk managers should analyze their company’s exposures to ensure they have the appropriate resources and insurance policies to recover from a loss.

LineSlip can help risk professionals understand how much they’re spending on insurance, what their limits are, and other policy data. LineSlip makes it easy for risk professionals to access and discuss risk and insurance spend with company executives so that they can determine what investments they need to make.

Solutions like the TCOR tool can help risk teams visualize their policy data and costs, so they can see if they need to purchase additional limits due to inflation or introduce new risk mitigation and safety programs.

LineSlip will also be releasing our upcoming True Replacement Cost feature, allowing risk managers to compare up-to-date replacement costs to their current amount of coverage. The feature will help them understand whether or not their properties are adequately insured so risk managers can know if they’re purchasing the necessary amount of insurance for their properties. This feature also simplifies the coverage and replacement cost reconciliation process, making it easier to stay on top of inflation and avoid penalties.