Due to recent inflation, homeowners bear a heavy burden when it comes to construction costs. One crucial offering insurers should consider is inflation guard coverage.
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Inflation & Insurance Costs
June 2022 marked the greatest increase to inflation in the past decade, up 9.1% compared to the previous year. The latest U.S. Labor Department data has shown May 2023 experienced a 4% inflation rate from the previous year, a notable improvement from previous months.
Inflation happens when the economy experiences an increased price level of goods and services over time. It erodes the purchasing power of currency and affects various sectors, including the construction industry. Understanding the factors that contribute to inflation, such as rising labor costs and increased material expenses, is crucial for insurance professionals.
According to the World Economic Forum, purchases most affected by inflation include food and beverages, housing, gasoline, appliances, furniture and vehicles. Inflation has also had a significant impact on insurance costs, particularly for homeowners insurance.
When a homeowner’s policy does not include inflation guard coverage, the coverage limit remains fixed, often based on the home’s initial value. However, without accounting for inflation, this coverage may not be sufficient to cover the rising costs of labor, building materials, and other expenses associated with rebuilding a damaged or destroyed property.
What is the purpose of the inflation guard?
Inflation guard coverage protects homeowners from the cost difference between owning their insured home and rebuilding their insured home.
Is inflation guard coverage necessary?
Homeowners who are at a higher risk of natural devastations, such as wildfires, tornadoes and hurricanes, may be most interested in inflation guard. Inflation guard can help homeowners avoid the following pitfalls:
- Insufficient Coverage: Homeowners who rebuild their homes without inflation guard coverage may find themselves facing a significant financial gap. As today’s construction costs rise due to inflation, a policy’s fixed coverage limit may become inadequate to cover the actual expenses incurred during the rebuilding process.
- Out-of-Pocket Expenses: Without inflation guard coverage, policyholders may be forced to pay the difference between the coverage limit and the actual rebuilding costs out of their own pockets. This can place an enormous financial burden on homeowners who are already dealing with the emotional stress of rebuilding after a devastating event.
- Underinsurance: Inflation can cause severe underinsurance if homeowners fail to update their policy limits regularly. Without proper adjustments to accommodate inflation, policyholders may unknowingly carry inadequate coverage, leaving them vulnerable to substantial losses in the event of damage or destruction to their property.
Importance of Inflation Guard Coverage
Offering inflation guard coverage is a proactive solution for insurers to help policyholders with adequate protection. By adjusting coverage limits based on the rising costs of building materials and labor, insurers provide homeowners peace of mind that their insurance coverage keeps pace with inflation.
Inflation guard coverage benefits both policyholders and insurers in the following ways:
Financial Protection: Inflation guard coverage offers homeowners the confidence that their insurance policy will provide sufficient funds to rebuild their homes in the event of a covered loss. This protection helps mitigate the financial strain caused by inflation and ensures that policyholders can fully restore their property without incurring substantial out-of-pocket expenses.
Policyholder Satisfaction: By offering inflation guard coverage, insurers demonstrate their commitment to meeting the evolving needs of their customers. This proactive approach enhances customer satisfaction and strengthens the insurer-policyholder relationship.
Risk Management: Inflation guard coverage helps mitigate potential risks for insurers by aligning the coverage limits with the actual costs of rebuilding. By accounting for inflation, insurers reduce the likelihood of policyholders being underinsured and the subsequent financial strain on both parties.
Why Inflation Guard?
Inflation guard coverage is an essential offering for insurers to consider, particularly in the realm of homeowners insurance. By addressing the impact of inflation on insurance costs and highlighting the consequences homeowners face without inflation guard coverage, insurers can effectively demonstrate the value and necessity of this protection to policyholders.
Providing adequate coverage that accounts for inflation ensures homeowners can confidently rebuild their properties without bearing significant financial burdens, ultimately strengthening the insurer-policyholder relationship and fostering customer satisfaction.
WaterStreet Company Insurance Professionals
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