Don’t know what shrinkflation is? Sure, you do. Maybe you didn’t know the term for it, but you’ve seen it when you go to the grocery store.
Shrinkflation is when food companies shrink their package size but keep the price the same. So you used to get 20 oz. of cereal for $3.99, but now it’s only 18 oz. at the same price. That’s actually an 11% unit price increase!
Save Me Time!
- Shrinkflation is when insurers remove coverage without telling you rather than raise your rates.
- The most common forms of shrinkflation are alternate deductibles for weather losses and roof depreciation.
- You can easily be on the hook for thousands of dollars of repairs if you get hit by shrinkflation. Read on to see an example.
The Rest of the Story
Shrinkflation is a trick companies use to make you pay more for less – and 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 higher prices if they come through shrinking packages.
Basically, companies think you’re stupid and would rather trick you than be honest about the price change. At Informed, we love to tell you how companies try to trick you so you can be smarter than them!
Insurance Shrinkflation
Now, maybe you’re wondering what any of this has to do with insurance? Oh, it has a lot to do with insurance! Insurance companies know if they raise your rate, you are more likely to shop for a new insurance carrier.
Therefore, they practice shrinkflation and take away insurance coverage to keep the price flat. This is actually the worst kind of shrinkflation because it’s extremely hard to detect! You can’t pick up your insurance policy like the cereal box and see that it’s smaller.
No, insurance shrinkflation is far more sneaky! Insurers change a few words in the policy that they know you’ll never read. Often, even your insurance agent is unaware of the shrinkflation.
Sometimes, these changes are minor, or for rare events, but insurers have become far more brazen in recent years and made major policy changes without informing consumers.
This shouldn’t happen. It disrespects you, the customer, and, unfortunately, most agents don’t make the effort to let the customer know how they are being tricked.
Don’t worry. Informed is here to help! We will be your second pair of eyes reading the packages for you to let you know when they’ve shrunk so you can better assess the value of what you’re buying.
The Worst Offenders
Let’s examine two important examples of shrinkflation and how they harm you.
Alternate Deductibles
What do you think your home insurance deductible is? $500? $1,000? What if I told you it might be 10X that? Would you be pretty upset about that if you had a loss and had to pay $5,000 or $10,000 out of pocket?
If so, you need to know about severe weather related deductibles!
In many parts of the country, your policy has two deductibles: the more common one that you know about – perhaps $1,000 – as well as a higher one that is often a percentage of your home’s insured value.
While often described as “hurricane deductibles”, this percentage based deductible – typically 1% or 2%, but they can be higher – can apply to many significant weather events depending on where you live.
If your policy has a “wind and hail” deductible, instead of a “hurricane” deductible, then you have a percentage based deductible even for a routine thunderstorm! Bet you didn’t know that!
If you’re starting to think, “wait, when I need insurance the most, they won’t pay as much?” well, congratulations, you now understand insurance shrinkflation!
To say it more plainly, if you have a $500,000 home with a 2% wind deductible, then you are paying $10,000 out of pocket for a claim, not the $1,000 you believed to be your deductible.
Also, to be clear, there are some benefits to this approach. It does keep your premium lower than if you had a $1,000 deductible across the board.
However, insurance companies shouldn’t be using sleight of hand to raise your risk. Customers should be aware of the risk that comes with wind and hurricane deductibles and have the option to pay more to lower or remove them.
Roof Depreciation
The other big area of insurance shrinkflation is 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 pay part of the cost. This wasn’t totally unjustified.
Many homeowners neglect basic repairs of their roof for normal wear and tear leaving the insurance company paying for claims that are partially caused by a weather event, but partially due to deferred maintenance by the homeowner.
However, rather than ask customers to pay more for full roof coverage or tell them they would have to share some of the repair costs going forward, insurers went the shrinkflation route and took away coverage without bothering to inform the homeowner.
What did they do? They came up with a formula that “depreciates” the value of your roof over time. That means as your home gets older, you get paid less for a roof claim – regardless of the actual condition of your roof! You can read more about roof depreciation here.
Did insurers write you a letter when they made this change so you would understand? Did they highlight it in big bold letters on the first page of your renewal notice? Do they provide you a copy of the formula they use so you know what to expect if you have a roof claim?
No, no, and no. They went the shrinkflation route and kept you in the dark!
How much will you have to pay yourself if you have a roof claim this year? Your guess is as good as mine. Ask your insurance agent and see if they can find out for you…and then ask them why they never told you this before!
Shrinkflation Squared
OK, you ready to have your mind blown? How about Shrinkflation Squared?
That’s right, you can have one loss with two kinds of shrinkflation!
Assume you have a $500,000 home with a 1% wind deductible, a $1,000 non-wind deductible, and 50% depreciation on your roof. A hailstorm causes $10,000 of roof damage. How much will the insurance company pay?
I know, no one told you there’d be math! But it’s OK, we can do this…
Before shrinkflation, they would have paid you $9,000 ($10,000 loss less your $1,000 deductible).
After shrinkflation…the insurer says you need to pay 50% of the $10,000, so that’s $5,000 for them and $5,000 for you. So you owe $5,000? Nope, you forgot the deductible.
OK, you get $4,000, right? The $5,000 – $1,000? Nope, you forgot the hail deductible. That’s another $5,000 at 1% of $500,000. What’s $5,000 – $5,000? $0.
That’s right, the insurance company just shrinkflationed you to pay $0 instead of $9,000! This is why it’s so important to get informed and understand how shrinkflation hurts you before you have a claim.
Make sure to ask your agent at your next renewal about your deductible levels and roof coverage, so you can explore options to address shrinkflation risks.
