Cumulative Inflation: The Case for Buying Higher Umbrella Limits

shutterstock_293044340Back in 1995, I had an excess/umbrella underwriter that I worked with tell me than on any day at any intersection on America’s highways, $5,000,000 can be the incurred loss in an automobile accident at that intersection. His logic was you don’t have a choice on who you might hit or who hits you. A family of four, large vehicle, school bus, motorcycle, passenger van, redi-mix truck – each of these vehicles can cross your path almost any day.  Driver inattention (texting, distractions, phone calls, daydreaming), road conditions, sun glare, hard rain and vehicle operating condition (brakes, tires) can also impact what happens at that intersection. In 1995, many small to medium sized businesses were only purchasing $1,000,000 in umbrella limits.

A policyholder buying a $1,000,000 limit in 1995 would have to purchase $1,568,550.43 in 2015 just to keep up with inflation. Annual inflation over this period was 2.28%. Our $5,000,000 intersection accident in 1995 has the same buying power as $7,842,752.17 in 2015.

Inflation annually has been low the last 25 years relative to inflation in the 70’s and 80’s. Yet low individual year inflation can add up over 20 years – in this case, 45.6%.

With inflation being the bad news, the good news is prices are falling in the excess limits/ umbrella market – in some cases, 10-15% this past year. Talk to your agent about purchasing affordable higher umbrella limits to protect your business from the unforeseen large auto loss. To learn more, visit: AssuredPartners NL Property & Casualty.

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