Inflation is currently on the rise, creating a stir in the economy whose effects are being felt in nearly every industry—some more than others. From an insurance perspective, one of the sectors most greatly affected is the construction industry, with the cost of materials skyrocketing in recent years, causing a domino effect for other expenses such as property insurance. As a homeowner, you know it’s important to have the proper coverage on your home and other assets, but what happens when these parameters are ever-changing thanks to inflation? Not to mention the fact that rising prices are putting further financial pressure on households across the United States. So today, let’s break down what’s been happening in the construction industry before discussing how this relates to your property insurance and what you can do to ensure your home and assets are protected heading into 2023.
Inflation and the Construction Industry
If you’ve recently been house hunting, considering a renovation, or building a new home, you have undoubtedly experienced the massively inflated prices for construction materials. For example, according to the US Bureau of Labor Statistics, the cost of building materials in the United States has increased by a whopping 48.9% since the start of 2020. This, in turn, affects home prices and insurance values, meaning you now have to pay more money for the same coverage, products, and services. However, before diving further into these effects, let’s take a closer look at how much some common construction commodities have increased in price over the last several years:
- · Copper pipe and tube – 88.3%
- · Steel pipe/stainless steel – 60.1%
- · Structural steel – 52.1%
- · Lumber – 54.6%
- · Plywood – 74.2%
- · Asphalt shingles – 33.5%
- · Cement/concrete – 22.9%
- · Fuel oil/gasoline – 72.2%
Between the disrupted global supply chains, worker shortages thanks to the pandemic, and increased demand for building materials and labor—particularly in the wake of several devastating disasters in the latter half of 2022—these pressures are amplifying inflation issues within the construction industry, which then trickles down into other sectors.
How Construction Costs Affect Property Insurance Rates
Beyond the obvious connection that homes are more expensive to build because the cost of materials has increased, you might not realize that elevated construction costs also affect your property insurance rates. This is because inflation is increasing not only the cost of the physical materials used to build your home but also the cost of expenses associated with owning and renting a property. These expenses are paid by insurance companies when a homeowner makes a claim on their property which is why home insurance premiums increase alongside construction costs.
For example, suppose the addition you added to your home nearly 10 years ago becomes damaged by a natural disaster such as a flood, fire, or hurricane. Once you’ve determined that the incident is covered under your insurance policy, it’s time to make a claim and begin the rebuilding process. However, the original cost to build the addition would be significantly less than the cost to repair it now due to the increased cost of materials.
Therefore, insurance companies need to increase your premiums to be able to offer you the same level of coverage as before. On top of all this, many insurance companies are experiencing an unusually high number of claims, which also contributes to higher rates for consumers. So, you’re probably wondering, what can I do to protect my home while also alleviating the financial strain that comes with inflation and rising insurance rates?
Ensuring Your Property is Properly Protected
The very first thing you should do is to speak with your local Nesbit Agencies insurance agent and double-check your existing coverage. Next, you need to determine if your property is still adequately covered or if you require an update on your policy. Something else to remember is that typically the amount of coverage needed on a building goes up incrementally each policy year, meaning a premium increase may not even be directly due to inflation.
It’s also important to note that the same logic applies to commercial buildings—a higher cost of construction materials usually results in an increased insurance premium, and in these cases, double-checking your policy is critical so that your business is covered if an incident occurs.
In order to alleviate the financial strain brought on by inflation, we have a few recommendations:
- · Review and update your insurance policy (as mentioned)
- · Bundle your various policies (if possible)
- · Consider increasing your deductible
- · Take advantage of any available discounts
- · Upkeep your home to minimize possible claims
Although this is not an exhaustive list, these are great starting points to consider when you’re looking into your current coverage and what you need moving forward.
Whenever you’re unsure about your coverage or why your premium is a certain amount, it’s always a good idea to simply contact your Nesbit Agencies insurance agent to ask for further clarification. They can help you review your policy, identify areas that lack proper coverage, and provide you with an updated policy to keep your home and other assets safe. We know you’re concerned about how insurance premiums have been on the rise, and you have questions as to why—and rightfully so. As you can see, it’s a combination of supply chain issues, increased construction costs, severe natural disasters, a higher number of property damage claims, and a higher dollar value for these claims that have resulted in elevated prices. At Nesbit Agencies, we are constantly reviewing our policies and premiums to be able to deliver the most economically feasible coverage without compromising on quality.
Jay Nesbit is the Executive Vice President of Nesbit Agencies and specializes in operations management, finance, mergers and acquisitions, and human resources. For more information or to update your existing property policy, contact a Nesbit Agencies insurance agent at (952) 941-9418 or firstname.lastname@example.org.