First and foremost, I would like to send our thoughts and prayers to the people affected by Hurricane Ian. I think we can empathize with them, and I know several of us have friends, relatives, and people we care about who were impacted by the storm. We have set up a fund that will match client donations here.
As a Certified Financial Planner (CFP), I am compelled to turn my attention to how this storm may affect rates going forward and to discuss some of the less-obvious factors already contributing to the rate crisis we are experiencing in Louisiana. There are three indirect culprits that may affect our rates just as significantly: Labor and material rates, Interest rates, and Reinsurance rates. Today I will focus on labor and materials.
Example: Many clients see that the coverage amount of the property they live in has increased year over year, but they struggle to understand why. For many, it seems intuitive that the coverage cost goes up as the market value rises, but why does the premium go up even more? The carriers’ reasoning is actually sound: the vast majority of property losses are not total losses. The insurance company is still on the hook to repair these losses, however. For example, if your kitchen caught fire only a year ago, you could possibly have had it restored for $50,000. $25k materials plus $25k labor. However, according to the National Association of Home Builders, material costs have risen a whopping 19% in the last year alone, and labor costs have risen over 10%. Your labor costs would now be approximately $28,000, and your material costs would come in around $30,000. Now, that project costs an extra $8-10 grand. Someone has to pay for it, and in the end it’s the consumer.
Supply and Demand: You may remember from your Economics classes in high school that, all other factors being equal, prices go up when demand goes up. Prices also go up when supply goes down. We are currently facing both, and it will get worse before it gets better. Two tried and true concepts to consider: Excess demand occurs when the quantity of a good or service demanded is greater than the quantity supplied at the given price. Shortage, in economic terms, is the condition where quantity demanded is greater than the quality supplied at market price.
Materials: Everything from labor shortages, to Covid shutdowns, to trade embargos has negatively impacted the ability of companies to acquire materials. This will be exacerbated by an increased demand for supplies, especially those needed to rebuild and repair the hundreds of thousands of homes damaged by Ian. While factories or mills can be reopened, the time, cost, and difficulty of this process will not increase supply immediately.
Labor: Materials are not the only thing affected by this demand, however. We have a more mobile workforce than ever before, and many of the laborers working in Commercial and Industrial construction travel extensively for their jobs. Their lodging costs will go up, their fuel and transportation costs will increase, and even the cost of a hot meal after work will go up. Once again, the consumer will end up absorbing these costs.
In order to compete with the demand in Florida, our costs will, by necessity, rise as well. This will affect premiums because the insurance company does not have a choice as to when you remodel your kitchen, replace your roof, or repair a busted water line. This is a good thing because you expect to be made whole as soon as possible. Like many good things, however, it comes at a cost. If you would like to make sure that the costs of your insurance remain reasonable while assuring that the coverage is adequate to cover the ever-increasing costs to make you whole again, perhaps we should talk...