Triple-I answers many questions from consumers and the media about exactly how inflation affects insurance premiums. As we explain in a new Issues Brief, the relationship between inflation and interest rates is somewhat straightforward – and yet the results aren’t necessarily what you might expect.
As the cost of materials and labor increases, so does the cost of repairing and replacing damaged homes and vehicles. If premium rates didn’t reflect these increased costs, insurers would quickly use up the funds they set aside – the “policyholder surplus” – to ensure they could afford to meet their promises to pay all claims. If losses and expenses exceed income for too long, there is a risk of insolvency.
But insurers do more than pay claims: They employ people (labor costs) and run the business (consumer and energy costs); and if they want to stay in business, they must make a reasonable profit.
So, as inflation and replacement costs rise, it is reasonable to expect a proportionate increase in auto and home insurance premium rates. However, as the charts below show, rates remained relatively unchanged during the sharply higher costs of 2021, which coincided with the peak of the COVID-19 pandemic.
Aside from not raising rates in proportion to rising costs, private auto insurers — expecting lower losses as fewer drivers were on the road during the lockdown — returned about $14 billion to policyholders through cash refunds and account credits. While the loss ratios fell sharply for a short time in 2020, they have been rising continuously since then and are exceeding the pre-pandemic level.
With drivers back on the road, this trend of losses is expected to continue.
It’s important to remember that the CPI and replacement cost reductions noted above do this not represent cost decreases, but rather reduced growth rates. These and other factors – such as unfavorable trends in accidental deaths and population shifts to disaster-prone regions – will continue to push premium rates higher.
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