Construction costs have risen sharply since 2021 and continue to be high. According to government data, construction material costs increased 26.7 percent and construction labor costs increased 5.5 percent in the first four months of 2022 compared to the previous year period. Rising construction costs have a negative impact on credit for homeowners and commercial property insurers because they drive up repair and rebuilding costs.
In order to combat inflation, homeowners and commercial property insurers are increasing coverage and rates. Insurers are raising coverage levels and rates in response to rising construction costs. In order to mitigate the impact on customers, insurers are likely to increase coverage levels gradually over time rather than all at once. According to Moody's annual survey of rated property and casualty insurers, homeowners insurers expect to raise rates by about 7% in 2022, up from 3% to 5% per year since 2015. Commercial property insurers anticipate a 6.5 percent increase in pricing for 2022.
In 2022, inflation will raise combined ratios. The extent of catastrophe and other storm losses in a given year heavily influences combined ratios for homeowners and commercial property insurance. Moody's expects combined ratios to rise (deteriorate) by about 2.5 points in its 2022 base case for homeowners, which assumes a 7% average rate increase on written premiums during the first half of the year and a 10% loss cost trend applied to current business and prior period reserves. In Moody's downside and stress scenarios, the combined ratio impact could rise to 5 and 7.5 points, respectively.
Although catastrophes remain a major risk, insurers remain well capitalized. Moody's said its rated insurers have enough capital to withstand potential underwriting losses due to inflation in homeowners and commercial property lines. Furthermore, insurers actively manage catastrophe risk through exposure limits, other underwriting initiatives, and reinsurance. US homeowners and commercial property insurers reported strong results for the first quarter of 2022, aided by low catastrophe losses.