Growing inflationary pressures impacting P&C industry
Rising consumer goods prices are leading to higher loss costs for insurance companies, as highlighted in home and auto markets.
According to the Labor Department, the U.S. is experiencing the largest increase in consumer prices since the height of the global financial crisis in September 2008. At the same time, the insurance industry is experiencing exacerbated inflationary pressures in homeowners and auto insurance lines, stemming from rapidly increasing prices associated with consumer goods and services that are relevant to the industry.
Prices for items such as construction materials, auto parts, rental cars, and medical and legal costs have been or are increasing at an even higher rate than overall consumer prices. As a result, this is impacting the insurance industry and marketplace through higher claims costs and increased upward pressure on premiums.
Across the economy, demand for consumer goods and services has been increasing significantly as many consumers are beginning to return to pre-pandemic life and spending funds received from the government and savings accumulated during the pandemic. At the same time, the supply of goods in many parts of the economy is unable to keep up with this increased consumer demand. This is in part due to supply-chain interruptions from the pandemic, as well as the difficulties of many businesses to return to pre-pandemic employment levels. This imbalance is causing a rapid increase in prices for goods and services. This is evident in the consumer price index which rose by 4.2% in April, relative to one year earlier.
In general, higher interest rates incentivize saving and disincentives consumption, which counters increased inflation by lowering consumer demand for goods and services.
Federal Reserve Chairman Jerome Powell emphasized that the Fed would wait for evidence that inflation will stay higher than 2% for some time, and the economy is at or near full employment before considering raising the target interest rate.
In this current environment of rapidly increasing prices, the property & casualty industry faces exacerbated inflationary pressures from prices associated with consumer goods and services that are relevant to the industry. This is especially impacting home and auto insurance lines.
Prices growing for construction material
For example, a recent surge in COVID-era home improvement projects, new home construction, and natural catastrophe repairs are impacting the prices of construction services and materials. As of April, the price of lumber has skyrocketed more than 400% from a year earlier. These price increases are hitting the insurance industry in the form of higher loss costs.
Additionally, the increasing frequency and severity of natural catastrophes are inflating losses for the insurance industry. Consumers and insurers together last year faced record storms, wildfires, and tornadoes. The National Oceanic and Atmospheric Administration is forecasting another record-breaking hurricane season in 2021, and western droughts are raising the probability of even worse record wildfires. Worsening catastrophic weather losses combined with higher home labor and materials costs will severely pressure rates and underwriting standards in the coming years.
Impact on auto insurers
Inflationary developments are also materializing in the auto insurance market. The consumer price index for auto insurance was up 6.1% in April compared to one year earlier — a jump the industry had not seen since 2018. In part, the recent jump in the auto insurance consumer price index is attributable to the market catching up to pre-pandemic driving behavior and normalizing miles driven. At the end of May 2020, auto insurance prices were 14.3% lower than a year before, a record decline in the 41-year history of the consumer price index. During this unprecedented time, insurers helped their customers by providing premium refunds and adjusting auto premiums in response to consumers driving less.
However, auto insurers also face significantly higher costs for auto parts and rental cars. The current global shortages in semiconductors and computer chips are driving up prices for vehicle computer systems and electronics. More broadly, the cost for many auto parts has been increasing due to supply-chain disruptions during the pandemic. The shortage in auto parts and the decrease in production of new vehicles are increasing the demand and costs for rental cars. These higher prices are therefore increasing claims costs for auto insurers.
Additionally, lawsuit abuse and skyrocketing legal awards, in particular nuclear verdicts, are exacerbating the impact of inflation on insurers. Aggregate liability claims for most insurance lines have been rising faster than retail price inflation. The consumer price index for medical care has been outpacing economy-wide inflation for years, driving up overall liability costs as well.
This year we can expect to see continued additional upward pressure on property & casualty industry premiums as the industry faces rapidly increasing claims costs for home and auto insurance lines. This all means more operational challenges for industry leaders to navigate, along with the potential for impacts on insurance consumer costs in the marketplace
This article is printed here with permission from the APCIA. Opinions expressed here are the author’s own.
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