Inflation Likely to Force Homeowners & Auto Insurance to Increase

There doesn't appear to be any good news about inflation on the horizon for consumers. When they receive their homeowner and auto insurance renewal contracts this year, they will most likely discover that their rates have increased significantly.

Source: Buffalo Today | Published on July 14, 2022

Personal Lines Outlook

Rates vary by location, making it difficult to predict how much they will rise. Analysts predict that the average increase will be in the high single-digit to low double-digit percentage range.

That may not seem like much, but analysts believe it is only the beginning. Some predict that such increases will occur each year for the next few years.

"With the American consumer already stressed by compounding inflation, a hike in their auto and home insurance policies will be most unwelcome," said Joshua Shanker, a Bank of America analyst.

Consumer inflation rose 8.6 percent in the year to May, the fastest rate since December 1981.

Inflation and weather events are raising homeowners' insurance rates.

A number of factors are combining to raise homeowners' insurance rates, including an increase in extreme weather events over the last five years and inflation. According to the National Centers for Environmental Information, the United States experienced 20 weather/climate disaster events in 2021, each with losses exceeding $1 billion. This compares to the inflation-adjusted annual average of 7.7 events from 1980 to 2021 and the annual average of 17.8 events from 2017 to 2021. All of these are losses that must be compensated for.

Insurers typically pass on some of these risks to reinsurers, but as catastrophic events become more common, reinsurers are "saying enough is enough and raising rates," according to Matthew Carletti, analyst at JMP Securities, a Citizens Company.

"As a result, insurers must pay more for that protection, which they pass on to consumers," Carletti explained.

Inflation, which has reached a 40-year high, is also a factor in higher renewal rates.

Not only did the housing market boom during the pandemic, but there were shortages of everything from lumber to oil (used for things like asphalt and roofing products) and even workers to build, repair, or remodel homes. All of this increased the cost of rebuilding a house in the event of a disaster, which is a major factor in pricing homeowners' insurance.

"The cost of home repair and construction materials is unlikely to change simply because the interest rate on a new mortgage rises to 6%," Shanker said. "And it appears that the underwriting margins, or lack thereof, for homeowners' insurance are at an all-time low, if not longer."

Higher costs are also increasing auto insurance rates.

Not only did the price of used cars skyrocket during the pandemic due to a lack of new cars for sale and a strong preference for road trips while flying was restricted, but labor and parts prices also skyrocketed due to shortages.

Combine that with an increase in accidents as vehicle miles driven returned to pre-pandemic levels in the spring, and you have a recipe for disaster.

"Suddenly, you have people driving more expensive cars, and they're driving like maniacs, and there are more accidents," Shanker explained. "It is obvious that this has harmed (underwriting) margins in the personal auto market."

Can I get a discount if I combine my home and auto insurance?

Analysts predict that price increases will also affect bundlers.

Typically, insurance companies can raise the price of one at the expense of the other in order to retain bundlers, who are more profitable over time due to their higher likelihood of remaining with the insurer.

"Bundlers are likely to discover that the prices of their auto and home policies are rising in lockstep, and the insurer has little ability to offset the increase by limiting the price of another part of the policy package," Shanker said.

He anticipates that bundlers' renewal rates will rise by 10% this year. He predicted that "potential sticker shock for a lot of customers, for a lot of the best bundling customers, will drive them to shop for a better deal." "These high-value, multi-policy bundlers are rare shoppers."