October 30, 2022

You've probably heard of shrinkflation. It's when you pay more for less – and companies hope you don’t notice. They realize people are more likely to recognize a price change than a size change, so consumers will object less to paying more if it comes through a shrinking package.

What does this have to do with insurance? Well, insurance companies know if they raise your rate, you are more likely to shop for a new insurance carrier. Therefore, they practice shrinkflation by reducing your coverage to keep the price flat. 

While sometimes, like with the smaller package, you can spot these changes on your policy's coverage page, in other cases, insurers change a few words in the policy that they know you’ll never read. 

This is the worst kind of shrinkflation because it’s extremely hard to detect! Often, even your insurance agent is unaware of these restrictions.

Don't worry though. You've got Informed on your side. We can show you what to look out for so you can be a smarter shopper.

Let's start by discussing the more hidden shrinkflation risks. Then, we will review the ones you can find on your own.

Hidden Shrinkflation

There are two common ways insurers can shrink your policy without you being able to tell. One is to add extra deductibles while the other is to take away roof coverage. What these have in common is they will leave you paying more than you expect if you have a claim.

Alternate Deductibles

Did you know that there is a good chance your policy has two deductibles? There is the one you are likely aware of that might be $1,000. However, for certain types of claims, you may have a second, larger deductible. These can easily be 10 times the size of your typical deductible.

If you live in a coastal state, you may be aware that you have a hurricane deductible, but many other states now have these extreme weather deductibles, often called "wind and hail" or just "wind" deductibles. They can apply to hailstorms, tornadoes, or even routine thunderstorms.

These separate deductibles apply to losses caused by significant weather events and are often calculated as a percentage of your home's value. This means if you have a $500,000 home with a 2% weather deductible, then you are paying $10,000 out of pocket for a claim, not the $1,000 you expected.

In other words, just when you need your insurance the most, it won't pay as much. Did anyone tell you that when you bought the policy?

Reduced Roof Coverage

It used to be, if your roof was damaged, the insurance company paid. Easy peasy. But then insurance companies decided they were paying too many roof claims and that homeowners should bear part of the cost.

Rather than ask customers to pay more to keep full roof coverage, many insurers went the shrinkflation route. What did they do?

First, they decided as your roof gets older, you get paid less for a roof claim, which means you have to pay for more of the repair yourself. 

Next, they decided they could repair your roof with different materials, so that your repaired roof might look very different from the remainder of your existing roof. 

These changes sometimes make sense and many policyholders might agree to them in order to save premium, but why don't they give you the option to pay more to keep the old coverage if you wanted to? 

Unfortunately, your insurer likely never told you whether they reduced your roof coverage and it is difficult to find this information without reading your contract closely, so you will want to ask your agent to investigate. 

If your roof coverage has been shrunk, hopefully you will avoid having a claim or you may be faced with a big bill and roofing materials that don’t match!

TIP:
"There are two common ways insurers can shrink your policy without you being able to tell. One is to add extra deductibles while the other is to take away roof coverage."

Hiding in Plain Sight Shrinkflation

While the examples above are hard for consumers to find, others are easier to spot, like the smaller cereal box. Here’s what to look for. 

One common trick insurers use to keep the sticker price down is to default the policy to low levels of coverage, such as $100,000 of liability or actual cash value on your contents instead of full replacement coverage. 

These levels will make sense for some homeowners, but for many people, they are too low and they can leave you at significant financial risk if you have a claim. 

In addition, make sure the insurer used a reasonable value for your home. Some insurers will assume too low an insured value in order to offer you a low premium, which could lead to a terrible outcome for you in a worst case scenario.

Fortunately, you can spot all of these shrinkflation tactics by closely looking at your coverage summary page that comes with your quote to make sure that cheap price wasn't a result of underestimating your insurance needs. 

If you don't think your quote has the right levels of coverage, you should tell your agent you don't want to settle for a shrinkflation policy and to show you another quote with more appropriate coverage.

Let us show you how to better protect your home.

What's the Worst That Can Happen?

Maybe you don't think any of this sounds all that bad and you are willing to take the risk to save some premium. That is for you to decide, but Informed believes you should have all the information to make that decision wisely rather than having it made for you.

As one final thought, consider that it is possible to have a claim that combines many of these reduced coverages at once, leaving you paying for a much higher amount of the damage than you expected. 

For example, if a hailstorm causes damage to your roof, you will not get fully paid for your roof and you will have to pay the higher roof deductible which could leave you with a very small payment from the insurance company.

If you'd like more help understanding how shrinkflation can affect you, please sign up for one of our policy reviews and we can help examine your coverage for you.

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