Insurance and Shrinkflation: Caveat Emptor!

Everyone is familiar with the significant price increases of many products and services in recent years. We call that “inflation” and it is essentially the reduction in value of a product or service based on the product or service remaining the same while its price increases.

But price inflation is not the only way that products and services can decrease in value. Sometimes we lose value in a product or service due to “deflation,” more commonly referred to today as “shrinkflation.” This has been an issue, in particular, in the food industry where prices stay almost the same but the quantity of what’s purchased declines.

For example, a 28 oz. box of corn flakes might sell for $4.99. A year later, the price for a box of corn flakes might still sell for $4.99, but the net weight in that box has been reduced to 24 oz. or less even though the box is still labeled “Giant Size.”

Some pundits have questioned not just the ethics of this practice, but whether it should be illegal to give the impression to a consumer that the product hasn’t changed.

A few months ago, I ran across an article that examined the historical pricing of toilet paper with regard to the number of squares in a roll and the size of those squares. In a subsequent blog post, I pointed out that this may create the illusion that prices are steady when the reality is that there has been a measurable decrease in the value comparable to an actual price increase.

Insurance Shrinkflation

The property/casualty insurance industry is not immune from shrinkflation. After decades of broadenings of coverage in personal and commercial lines products, I believe more recently we’re seeing reductions in coverage, often to keep prices from increasing due to inflation, increased loss frequency and severity, and other causes.

My personal lines account just renewed at about the same price it has been for the past three years. I feel lucky given the amount of feedback I get from agents in the trenches with regard to prices increases of 50%-200%. However, I did have one reduction in coverage with regard to roof damage. My insurer, like many if not most insurers, has introduced an age-based depreciation scale and increased the windstorm deductible for roof coverings.

Fortunately, for me, my roof was replaced this year, so I’m covered for the full replacement cost, but I do have to contend with the higher deductible. The unfortunate side is that the reason I have a new roof is because I lost quite a bit of it with an EF1 tornado last year. But a coverage reduction like this beats a nonrenewal.

In the insurance industry, this type of shrinkflation is not new but the reasons for it may be different than those in other industries. I wrote about this over 10 years ago in an article for Independent Agent magazine. Why do insurers reduce coverage? I think there are three main reasons.

First, many consumers are price shoppers and that’s all they consider. The perception that “insurance” is a commodity differentiated solely by price is fueled, I believe, by the industry’s incessant price-focused advertising. And it’s perpetuated by consumer articles and reporting that suggest that comparing the pricing of identical coverage limits and deductibles is an adequate way to distinguish between competing products.

I’ve made soapbox appeals for many years that insurers need to reconsider how they advertise, but sadly my suggestions seem to have fallen on deaf ears. I’ve suggested to regulators that, like pharma advertising, perhaps disclaimers should be included with insurance advertising to make it clear to consumers that insurance policies vary by more than just price.

Second, sometimes insurers cannot get actuarially substantiated rate relief and, to ensure solvency, they have no choice other than to reduce coverage. Too often, rate requests are denied for political or other reasons, and insurers must then impose coverage restrictions or discontinue operations in that regulatory jurisdiction.

Third, some insurers simply sell inferior products to unsuspecting consumers, almost exclusively to those who shop solely on price. I’ve told the story many times of getting bids from tree service companies to remove 18 trees from my residence and asking, of course, for proof of insurance.

One of the bidders had purchased coverage through an E&S broker and carrier and I noticed that their CGL premium was barely $700. When I looked at the list of endorsements on the tree company’s declarations page, one of them excluded any claims involving ongoing or completed operations. The insured essentially had no coverage for what he was doing. That’s quite a reduction in coverage and one he was completely oblivious to.

The Insuring Process

Almost six years ago, I wrote about three stages of the insuring process that could result in an uninsured claim.

The first stage is the failure to identify and/or quantify exposures to loss. This is why claims by insurtechs and even legacy insurers that they can insure you in minutes are so ridiculous. There’s a saying that, “What you don’t know can’t hurt you.” That absolutely is not true in this industry. What you don’t know can bankrupt you.

The second stage of the process involves insuring or risk managing known exposures. This is where the agent’s knowledge of the products he or she sells is critical to matching exposure to coverage, as is the underwriter’s ability to assist the agent in choosing wisely.

The third stage of the process is perhaps the most often overlooked. It involves quality-controlling policy deliverables. The agent needs to make sure that what the insured asked for is actually provided in the insurance contract. However, be aware that, in addition to forms and coverages specifically requested from the insurer, there will almost certainly be forms attached that were not requested. With regard to such additional forms, it is critical to “Be careful what you DON’T ask for.” Forms that reduce or limit coverage often can be removed or replaced by less onerous versions, either by simply asking or paying a small additional premium.

I’ll leave you with a quote from John Ruskin who said, “There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.”