Inflation and your insurance agency
If you’re living in the U.S. (or anywhere in the world for that matter) in 2022, the conversation about inflation is unavoidable. Inflation’s been on the rise since 2021, and while there may be signs it’s slowing down in recent months, no one expects inflation to end quickly. The Federal Reserve continues to increase interest rates with the hope of cooling down the economy, but not so much that it drives the country into a recession.
While no one can say definitively what the exact cause of today’s inflation rate is, contributing factors include everything from the Covid-19 pandemic and labor shortage, to supply chain issues and the war in Ukraine. The result is where we’re at today, and business owners in all industries are scrambling to rebuild, reinvent, and reevaluate their business processes to better accommodate this changing economic climate.
And yes, that includes the insurance industry. Though often referred to as “recession-proof,” insurance carriers, agencies, and agents are not necessarily shielded from the effects of increasing inflation and rising costs.
How does inflation impact the insurance industry?
You probably notice inflation the most when you go to buy something. High inflation causes the cost of just about everything from food to entertainment to skyrocket. That means an increase in the cost of building materials for homes, replacement parts for cars, and an increase in labor costs – among many other things. These increases most directly impact insurance by way of more expensive claims. With the price of everything higher than before, the cost to repair damages to a home or vehicle has gone up accordingly.
Insurers typically respond to inflated claims costs by increasing premiums, but in some cases, losses are too large—and too common—and insurers simply stop offering coverage in a specific market. As an independent agency or agent, you’re not paying out claims yourself but you can still be hit with higher costs to operate your business. On one hand, you might be able to offset some of these rising costs by getting a little bit more in commission from carriers as premiums go up. But ultimately, you’ll need to continue selling more policies to more clients if you want to remain profitable.
How can insurance agencies prepare for the impacts of inflation?
Insurance agencies run like many other businesses, so general business tips for dealing with inflation still apply. But there are also some considerations unique to the insurance industry and the role independent agencies play in insurance distribution.
Focus on helping clients manage and prevent risk
Better managing risk and preventing claims when possible benefits everyone. For your insurance carrier partners, it can improve their loss ratio and increase profitability. For your clients, any accident prevention or reduction in claims is a good thing. And for your agency, you build a reputation for working with clients in a consultative manner instead of just “selling insurance.”
There are plenty of high-tech and low-tech ways to go about preventing risks before they become insurance claims. Everything from periodic safety training for employees to using historic data and predictive models to forecast likely risks can be part of the equation. Taking a risk-prevention role can also benefit your agency beyond the impacts of inflation. It can be a great way to attract new clients and future-proof your agency.
Reduce operational costs by investing in modern technology
As costs continue to rise for everything from your office supplies to your workers, there’s never been a better time to increase efficiency and save money than by introducing more automated processes to your insurance agency.
Many of the repetitive, time-consuming tasks necessary for the day-to-day running of your independent agency are still being performed manually. This can mean the people you have are spending more time than necessary on laborious administrative tasks instead of revenue-generating ones. It can mean your team is less satisfied because they don’t have access to technology that would make their jobs easier. It can lead to turnover and the inability to attract new talent. Or it can mean you need to hire additional, costly workers just to handle the amount of business you have.
By automating manual tasks both on the client-facing side and the back-end operations of your agency, you can decrease the amount of time you and your team are spending on these tasks. Automation also comes with the added bonus of minimizing human error, which lowers the time and money you might spend fixing mistakes.
Remain flexible and be proactive
One of the biggest threats of inflation is the uncertainty it carries. While economists can predict what’s to come to some degree, no one knows exactly how long the current bout of inflation will last or how high it will go. The one thing we can do is to be prepared and remain flexible.
When it comes to insurance agencies, this means having a plan in place for addressing increasing costs and labor shortages. It also means being able to respond to economic changes quickly and with little-to-no negative consequences or organizational slowdown.
How does the insurance industry benefit from inflation?
You may be surprised to learn that there’s one big benefit to inflation for insurance agencies. As we’ve previously mentioned, higher inflation leads to higher premiums. This means agencies are likely earning more on commission for each policy they sell. Plus, as claims costs begin to decrease again, agencies will reap even more significant benefits from these higher premiums.
However, it’s important to note that this isn’t really a long-term benefit. As costs begin to return to normal and the insurance market softens, you’ll probably see carriers start to decrease premiums to avoid losing customers. Still, rising premium costs brought on by inflation can at least help in the short term to offset your agency’s rising cost for everything else.
Protect your agency from the impact of inflation
Inflation is a long-term and lagging economic issue. Even though governments and financial regulators are acting now, we don’t expect to see the positive impacts of these actions for months, or even years. In the meantime, it’s important to focus on what you can control. On top of the points above, independent insurance agencies can also increase revenue by working with more, and better, insurance carrier partners. Learn more about partnering with Pie Insurance.