Though market analysts believe the industry is well-positioned to absorb catastrophic losses, experts warn that inflation will make claims more expensive to pay out. This is because the value of deductibles to insurers is declining, and investment portfolios are tracking lower with the broader economy, incentivizing risk mitigation measures.
According to the US Bureau of Labor Statistics, consumer prices rose 8.6 percent year on year ending in May, the highest inflation rate since the 12-month period ending in December 1981. Insurers are also considering the impact of "social inflation," which refers to rising costs associated with increased coverage litigation, claims payments, and so-called "nuclear verdicts" that cost carriers millions of dollars.
"Social inflation is less visible. It can only be seen after the fact. It is not discernible as a forerunner to the claim "David Mamane, a financial services analyst at the consulting firm RSM, agreed. "It takes on more of a reputational aspect."
Insurance industry trade groups like the American Property Casualty Insurance Association have made it a priority to reduce litigation in states like Florida. According to Florida's insurance regulator, 76 percent of all homeowners insurance lawsuits in the United States were filed in Florida last year, despite the state accounting for only 8 percent of the nation's property claims.
According to a new insurance litigation report from legal analytics provider Lex Machina, homeowners insurance case filings have steadily increased since 2016. However, according to Lex Machina data, those filings more than doubled from 2020 to 2021, owing largely to Hurricanes Laura and Ida.
According to Lex Machina, hurricane-related case filings accounted for 55% of homeowners insurance litigation and 26% of all insurance litigation in federal courts last year.
However, hurricanes were not entirely to blame for the increase in claims. According to the report, there were 2,491 filings unrelated to hurricanes in 2021, up from 1,490 in 2012, indicating a steady increase in the intervening years.
According to the Lex Machina report, many of those claims originated in Florida.
Florida lawmakers approved a $2 billion reinsurance program last month to reimburse carriers for their two largest loss events in a year, a plan signed by Gov. Ron DeSantis as part of a larger property insurance package. Nonetheless, experts believe that inflation will pose a challenge to Florida property carriers who are already under financial strain.
In a recent report, credit rating agency AM Best stated that Florida's insurance market has deteriorated due to secondary perils such as wind and hail, higher litigation costs, exploited building codes, and rising reinsurance costs.
According to AM Best, inflation will only exacerbate losses as home values rise.
"With an active hurricane season on the horizon, punctuated by a potential tropical storm nearing the region," AM Best associate director Chris Draghi said in a statement.
Lauren Cavanaugh, a senior managing director at FTI Consulting who specializes in property and casualty lines of business, believes carriers could use reinsurance to mitigate some inflationary risks. However, she noted that reinsurers will consider inflation and may adjust the price of their excess loss coverage policies accordingly.
Loss portfolio transfers, which allow insurers to reinsure their investment portfolios, are another way carriers could potentially mitigate inflationary pressures, according to Cavanaugh. She added that insurers' responses to inflation may differ depending on the underlying cause of the inflation, such as a temporary surge in demand following a storm.
"That may be perceived as a relatively short-term concern, which would be treated differently than if the drivers are more broad and potentially more long-lasting," she said, adding that persistent inflation would have a greater impact on longer tail lines of business.
Fitch Ratings, a market analyst, stated in an April report that while inflation adds an element of uncertainty for insurers underwriting property and auto lines, the industry as a whole still has adequate reserves and a favorable outlook to pay future claims liabilities.
Workers compensation lines, according to experts, are among the types of businesses most affected by long-term inflation. However, property insurers operating in high inflation environments will frequently adjust policy terms during renewal, including premiums and deductibles, to help mitigate the risk of inflation, according to experts.
In periods of high inflation, a fixed deductible will be met sooner, according to Cavanaugh. Insurance companies may also adjust deductibles based on a percentage of a property's value, but the considerations for such a change are more complicated, according to her.
Premiums have been rising for years, even before inflation reached recent highs. According to insurance broker and risk adviser Marsh, global insurance prices rose 11% in the first quarter of 2022, marking the 18th consecutive quarter of growth.
Another RSM financial analyst, Marlene Dailey, who leads the company's claims consulting practice, said insurers will mitigate inflation risks in a variety of ways, including limiting exposure in coastal and wildfire-prone areas. She also stressed the importance of using technology to better understand risks and manage claims.
"It is primarily interested in leveraging data. I believe there is a greater sense of urgency today than I have seen in many years "Dailey stated to Law360. "Using drone companies, satellite imagery — different things you can do technologically to better model and forecast from an underwriting standpoint, but also from a claims standpoint to quickly assess damages and settle the claim."
However, Dailey cautioned that insurers who use multiple technology platforms to conduct business may face difficulties. Some insurers, she claims, continue to use IBM's AS/400 computer system, which was introduced in 1988. Getting valuable data out of those systems can be difficult, according to the Florida-based analyst.
According to Mark Friedlander, a spokesperson for the Insurance Information Institute, an industry trade group, both inflation and social inflation have a significant impact on market performance. According to Friedlander, the group expects the transition to lower inflation to take longer than the Federal Reserve's 4.3 percent year-end forecast.
"Delays in the supply chain and the business cycle constrain supply, causing prices to remain elevated — with the war in Ukraine exacerbating global trade disruptions and keeping prices elevated for longer," he explained. "We expect loss pressures to persist across the P&C insurance industry as a result of inflation and supply chain disruption."
Following Russia's invasion of Ukraine in February, AM Best stated that if inflation exceeds expectations, the cost of servicing claims and the adequacy of reserves could suffer. Even before Russia launched its attack, analysts warned that reinsurers faced a significant loss due to inflation on longer-term claims.
Friedlander claims that in many cases, carriers' claims costs and expenses exceed their premium collections, resulting in higher commercial rates for insurance lines such as property, auto, liability, and cyber. He believes that the healthy premium growth seen in 2021 will likely continue through 2024 due to market conditions.