Triple-I: Insurer Premiums Did Not Keep Pace with Inflation for Years

U.S. auto and homeowners insurance premium rates lagged behind the inflation rate in 2020 and 2021, laying the groundwork for the premium increases which occurred last year and will continue into 2023, according to the Insurance Information Institute (Triple-I).

“As material and labor costs rise, the cost to repair and replace damaged homes and vehicles increases. If premium rates didn’t reflect these increased costs, insurers would quickly exhaust the funds they set aside— ‘policyholder surplus’—to ensure that they can afford to keep their promises to pay all claims,” according to Triple-I’s just-published Issues Brief: Trends and Insights: How Inflation Affects P/C Insurance Premium Rates – and How it Doesn’t. “If their losses and expenses exceed their revenues by too much for too long, they risk insolvency.”

But insurers do more than pay claims, the Brief noted. “They employ people (labor costs) and conduct business operations (supplies and energy costs); and, if they are to remain in business, they have to earn a reasonable profit.” Each insurer’s policyholder surplus accounts for its total assets, after subtracting all of its liabilities.

The Triple-I Issues Brief noted how auto insurance premium rates aren’t just affected by inflation costs. They are also impacted by the frequency and severity of claims auto insurers must process. U.S. traffic crash fatalities were extraordinarily high in 2020 and 2021, as well, due to riskier driving behaviors – more speeding, driving under the influence, not wearing seat belts and distracted driving.

Moreover, attorney involvement has become more prevalent in auto accident claims involving bodily injury and fatalities, contributing to protracted litigation and higher claims costs, Triple-I’s research has found.

Similar considerations are impacting the U.S. homeowners insurance market. Global economic losses from tornadoes, hurricanes, severe storms, wildfires, floods, and other natural disasters reached $270 billion in 2021, according to Swiss Re. Of those losses, $111 billion were insured.

“Much of this loss trend is due to people moving into risk-prone areas. More people, homes, businesses, and infrastructure means more costly damage when extreme events occur. More damage to insured properties means more and larger claims,” the Triple-I’s Issues Brief stated.

Because of the way insurers are regulated, options for responding to escalating claims other than by raising rates are severely limited. Without substantial rate increases, insurers might have to draw heavily from their policyholder surplus or write less coverage.

These trends make it likely that both home and auto insurance premium rates will have to rise significantly in years to come. Even if general inflation levels off, labor and replacement-parts costs will continue to rise, albeit at a slower pace. That is why mitigation is crucial to contain or reduce premium rates. For auto insurance, this means creating incentives for safer driving, improving enforcement of safe-driving laws, and reducing bodily injuries and fatalities that contribute to inflated legal costs.

For homeowners’ insurance, it means pre-emptive mitigation measures, from taking steps to reduce weather-related damage to installing smart-home technology that detects vulnerabilities like plumbing leaks before they result in an expensive claim. It also means improving building and land-use codes, considering policy changes to discourage development in disaster-prone areas, and establishing community-based catastrophe insurance and other programs to close insurance gaps.