Where middle market clients are most exposed to inflation risk
Specific concerns coming out of the reinsurance and insurance markets include increases in property replacement and repair costs, increases in medical costs for injured workers or third-parties, wage increases and the impact on loss of earnings, and a huge uptick in legal fees and judgments for any third-party liability claims.
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“The most important one for our clients is really related to property,” said Sallada. “As you think about how clients look at their schedules of property and their exposures, what they were valued at in 2020 is not sufficient for 2022. If the client had a building or an operation, and there was a fire or a total loss, that cost to rebuild [today] would be almost double in terms of what was listed on the insurance policy [in 2020]. I’m generalizing, but I’m trying to make the point that our clients’ values for their property right now are too low for what the costs to rebuild would be.
“That’s a huge issue for our clients [and we have] to make sure in 2022 that we’re out there working with them to have proper valuations not only for the cost to rebuild real property, but for business income losses that they could suffer if there was any type of claim. Many clients, unless they’ve done the work this year, are undervalued for that. It’s good work to make sure you’re at the proper values, but then the commensurate issue is that your [insurance] prices are going to go up. The premiums are going to go up for the higher values that you have now listed on your policy.”
Sallada encouraged businesses to dive deep into their property valuations to ensure they have the right insurance coverage limits. He was candid in saying “there’s no point in buying the insurance” if it’s not designed to properly cover the risk, and he said insureds should work closely with their brokers and other experts to ensure they get their valuations right.
“Another area of concern is workers’ compensation,” he added. “Wages are growing because of the labor market [and inflation], but that doesn’t mean [insureds] have a commensurate increase in losses. However, all their workers’ compensation policies are based on payroll, so if they see their wages going up without commensurate loss, they’re still going to be paying more in premium. That’s something that our clients need to think about, and we need to help them mitigate how not to pay extra premiums because their payroll is artificially going up because of the labor market.”
Auto liability is another “really interesting” and somewhat “strange” line of insurance for businesses at present, according to Sallada. During the COVID-19 pandemic, when there were less cars on the road, there was an artificially low number of claims. But now, traffic is almost back to its pre-pandemic levels, there are more trucks on the road, and claims are returning at a time when there’s significant inflation in the cost to repair vehicles, rent vehicles, and a jump in the severity of verdicts in third-party damage cases.
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“Lastly, from a general liability (GL) perspective, increased sales [are causing] increased premiums on GL programs,” said Sallada. “Clients need to look at the limits associated with those programs. Insurance companies sell primary policies with $1 million limits or $2 million limits, and then clients will buy an umbrella tower on top of that, to some extent. But whatever you thought your ultimate liability was as a client two-years-ago, it’s got to be more today, because those dollars don’t go as far, so you need to make sure you’ve capped your liability. Clients looking to increase their towers to account for claims, all of that is good risk management, and we’ll take into account the inflation that’s going on in 2022, but it’s not done without increased premiums to purchase these new policies.”
Brokers can help their clients to mitigate costs. Sallada explained: “One of the interesting ways to do that is by looking at your deductibles. You’re in an environment where inflation is causing some artificial problems for you on your workers’ compensation or your GL program, so take some of that risk yourself. Don’t transfer that extra premium to the insurance company, who’s just collecting it because of inflation. It might be a time where you want to bet on yourself a little bit more and take some more risks, so you can keep that premium in-house and direct it to the area where you’re going to need to spend it, which is on your property program.”
