InsurOp-Ed: Shrinkflation and Insurance

This post was first published on Mr. Wilson’s blog on August 19th

Yesterday I stumbled across an online article entitled “Why toilet paper keeps getting smaller and smaller.” The article looks historically at the changes in toilet paper as to the number of squares in a roll and the size of those squares.

When this happens without a price reduction, it can create the illusion that there has not been a price increase when the reality is that there has been a value decrease that results in the same financial impact.

Over the past year, we’ve heard a lot about this “shrinkflation” with the potential implication that inflation is worse than it appears and the fault lies with the seller of the product.

The same thing can happen with insurance. Although we’re seeing significant increases in various forms of P&C insurance, coverage “shrinkflation” has been going on for some time. In some cases, this is due to insurers selling less coverage at the same price, which can be disastrous for price shoppers. As I’ve said thousands of times, insurance is not a commodity differentiated solely by price.

On the other hand, sometimes this is not done by the insurer for profit or due to competitive pressure. In some jurisdictions, depending on filing laws or political pressure, an insurer may not be able to get an indicated rate increase. When that happens, to ensure solvency, the carrier may resort to reducing coverage.

In addition, sometimes government entities seek to create coverage where none exists by misinterpreting existing laws or regulations or introducing new laws. I blogged about this in my article entitled “Government Mandates that Insurers Pay for Uncovered Claims” which was about legislative proposals requiring insurers to pay for uncovered COVID-19 claims.

But I digress. The point of this article is to make everyone aware that insurance “shrinkflation” exists. In some cases, its because an insurer or its agent is selling an inferior product at a marginally reduced prince. In other cases, it’s because an insurer cannot get rate relief and feels compelled to reduce coverage. In either case, it’s always good to remember this cautionary quote from John Ruskin:

“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.”

Bill Wilson, CPCU, ARM, AIM, AAM

Founder at InsuranceCommentary.com

One of the premier insurance educators in America on form, coverage, and technical issues; Founder and director of the Big “I” Virtual University; Retired Assoc. VP of Education and Research from Independent Insurance Agents & Brokers of America.