Insurers Are Facing More Than One Kind of Inflation

Inflation comes in many forms, and pretty much all of them are affecting insurers right now. 

Source: WSJ | Published on August 3, 2023

Inflation and insurers

Inflation comes in many forms, and pretty much all of them are affecting insurers right now.

Auto and home insurer Progressive this week reported a big jump in its combined ratio, which measures underwriting losses and expenses as a percentage of premiums, to 100.4% in the second quarter. That is up from 95.6% a year earlier. This happened despite 18% growth in net written premiums in the quarter, reflecting the efforts that Progressive and other insurers have been making to push through higher rates to customers.

That effort, combined with slashing expenses—like how frequently you might see insurance mascots Flo, Mayhem or the Gecko on television—seemed like a promising formula. But the challenges right now feel like they are accumulating faster than the solutions. Shares of Allstate, Progressive and Travelers are all down or about flat since the start of July, even though banks and financials more broadly have rallied.

On the weather front, significant wind, hail and tornado losses accounted for nearly 67 points of loss ratio in Progressive’s property-insurance combined ratio in the second quarter, which was 133.2%, the company reported. Allstate, meanwhile, this week reported a nearly 38-point jump in its combined ratio for homeowners insurance over the first quarter, to 145.3%, which it attributed to catastrophe losses.

This has been an inflated year for natural disasters in the U.S. The number of U.S. potential billion-dollar weather and climate disasters in 2023 through June has exceeded every year tracked by that point besides 2017, with 12 such events so far, according to the National Oceanic and Atmospheric Administration’s National Centers for Environmental Information. The average from 1980 to 2022, adjusting costs for inflation, was around eight annually.

The frequency of events isn’t the only problem. Progressive said in its shareholder letter that though the number of catastrophe events affecting it actually dropped in the second quarter from a year earlier, the severity of these events was higher. Progressive also said that unfavorable additions to its reserves for prior accident years, which reflect worsening expectations of ultimate future losses, have accounted for four points of increase in its combined ratio in the first half of the year.

Some of that is due to rising home or auto repair costs, driven by higher parts or labor costs. But it is also due to longer auto repair times, which in turn leads to longer times the company must pay for a rental car for a customer. Another factor is rising litigation expenses such as injury and medical claims, particularly in Florida, a phenomenon sometimes known as “social inflation.” Progressive attributed about 40% of its prior-year accident reserve development in personal auto this year to the Sunshine State alone.

Some of these pressures may be starting to subside. Progressive said that much of what was driving auto reserve development was from 2022, enabling fixes to new coverage, and that average rental-car days were down 3% over last year in the second quarter. In Florida, “tort reform will likely have a positive impact,” Progressive said, referring to an overhaul of the state’s insurance laws passed in March.

Yet with new challenges seeming to always crop up, investors should stay cautious. The one silver lining is that the industrywide impact of these things means that it would be hard for any one insurer to grow too aggressively even as rivals raise their rates. In fact, slowing a bit now, to get pricing right ahead of potential improvements on the cost side of things, may be critical to grabbing share in the future. Insurance, after all, isn’t just about avoiding risk, but pricing it correctly.