Inflation has a wide-reaching impact on almost every sector and aspect of the economy. One of the less discussed but equally significant sectors where inflation plays a pivotal role is insurance. Whether it is life, auto, health, or property insurance, inflation can profoundly impact the cost of coverage. Understanding how inflation impacts your insurance premium calculation can help you make more informed decisions while budgeting and deciding a coverage.
What is Inflation?
Inflation is a term used for a sustained increase in the prices of goods and services over a period. An increased level of inflation can erode purchasing power and disrupt economic stability. Increased prices for essential goods and services impact households by raising their cost of living and eroding savings as it brings down the real value of money saved. For insurance companies, inflation means that the costs associated with claims such as repair costs, medical bills, or property replacement also increase, and these rising costs often get passed on to policyholders in the form of higher premiums.
The Impact of Rising Inflation on Insurance Premiums
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Rising Claim Costs
Inflation directly impacts the costs associated with settling claims. For example, the cost of health insurance claims is directly impacted by medical inflation. This includes rising hospital expenses and the cost of medicine and medical equipment. As the cost of healthcare increases, insurance provider also has to pay more when policyholders require medical treatment. To keep their business model sustainable, the insurance company has to compensate and pass on the cost to the policyholder in the form of an increased premium.
Let us understand this with an illustration. Suppose you have health insurance coverage with a sum insured of INR 10 lakhs. In an inflationary environment, the cost of medical procedures that previously cost INR 3 lakhs might rise to INR 5 lakhs. To manage the risk and keep the financial model sustainable, the insurer might increase your premium by 15-25% during policy renewal, without changing the level of coverage for you.
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Higher Repair and Replacement Cost
The same goes for auto insurance, property, and home insurance which are significantly impacted by inflation. When inflation drives up the cost of automobile components, construction materials, and labour, repairing a car or rebuilding a home becomes more expensive. Insurance companies adjust premiums to account for these higher repair or replacement costs.
For instance, if the cost of rebuilding a house increases from INR 40 lakhs to INR 50 lakhs due to the increased cost of labour and materials, an insurer will likely raise premiums to reflect the increased cost of fulfilling claims.
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Impact on Life Insurance
Term insurance typically comes with a fixed premium structure and is priced based on the assessment of the likelihood of the policyholder’s death during the term. Hence, the cost of term insurance already purchased is not directly impacted by inflation. However, new policies may come at a higher price as inflation reduces the real value of the sum assured. This may prompt individuals to seek higher coverage, which comes at an increased cost. An inflation calculator can be of great help in deciding the coverage by factoring in inflation.
For instance, you purchase term insurance with a sum assured of INR 1 crore, which may have been adequate a decade ago. However, with inflation eroding the value of money, a similar level of financial security today might require a policy worth INR 1.5 crore, which can result in higher premiums.
Inflation Protection Features in Insurance Premium
Some insurers offer inflation protection features to help policyholders keep pace with rising costs. ‘Inflation protector’ features in health insurance policies allow for annual increases (5% to 10% annually) in the sum assured to account for inflation. However, increased coverage can typically result in slightly higher premiums. Likewise, some home insurance policies also come with features like inflation guard
That gradually increases the coverage limit on an annual basis to account for the rising cost of construction.
Tips to Reduce the Impact of Inflation on Insurance Cost
Though there are inflation protection features offered in some insurance policies, all policies may not come with these features. Here are some important tips to reduce the impact of inflation on insurance costs:
- Regular review of policy coverage: Assessing your coverage needs regularly helps you understand if the coverage is adequate for the given inflation. It is also important to understand the factors affecting insurance premiums while reviewing your coverage to make a wise choice.
- Go for top-up plans: Instead of buying a new policy or upgrading the base plan that is expensive, opt for top-up plans that offer additional coverage at a lower cost.
- Bundle policies: Some insurers offer discounts if you bundle multiple policies, such as auto and property insurance. Consider such options based on your needs.
- Shop around: Compare premiums across insurance companies to find policies that offer better inflation-adjusted value. SecureNow makes it easy to shop around as you can compare policies from different insurers side by side. You can also make use of online tools like insurance premium calculators.
Conclusion
To sum up, inflation is an inevitable economic phenomenon and it can have a significant impact on insurance premiums. Whether it is the rising cost of construction, healthcare, auto components, or essential goods, inflation influences the claim expenses leading to adjustments in the premiums you pay. Increasing the premium according to rising costs is also essential for insurers to provide you adequate protection and remain solvent. However, understanding the impact of inflation on insurance costs can empower you as a policyholder to make rational and wise decisions by adopting some cost-effective strategies.
Frequently Asked Questions (FAQs)
Are there insurance products that are designed to counter inflation?
Yes. There are market-linked insurance products like ULIP (Unit Linked Insurance Plans) that allow you to invest in equity and other asset classes in preferred allocation (as per your risk profile) to get the inflation-beating return on investment.
Does inflation affect claim payouts for term insurance?
No. Inflation does not impact the actual claim amount, as it is pre-determined at the time of policy purchase. However, inflation erodes the real value of money and hence can reduce the purchasing power of the claim amount.
Does inflation affect new insurance policies?
Yes. Inflation mainly impacts the new policies as insurers factor in inflation at the time of premium calculation. Increases cost of healthcare, repair costs, rebuilding costs, etc. are considered for premium calculation.
