Historic Inflation Driving Up Loss Costs for Auto, Property Insurers

The two possessions that most concern insurers — homes and motor vehicles — happen to be the largest contributors to the historic 7.5% inflation rate announced last week.

Perhaps that should be no surprise.

“It’s the things that we all spend the most money on,” said CCC Intelligent Solutions analyst Susanna Gotsch during an interview.

Gotsch posts periodic analyses of issues that impact auto insurance claims. Her February trends report is dedicated solely to inflation. CCC released the report a few days before the US Labor Department reported the greatest annual inflation rate since 1982, but the government has been tracking surging consumer prices month after month all year long.

CCC said that used car prices have increased 45.2% from June 2020 to June 2021. New car prices increased 12.2% in 2021, according to Labor Department data released last week. The government reported a 40.5% used car price increase from January 2021 to January 2022.

Shelter increased at an unadjusted 4.4% rate over the past year. Although that was a lower inflation rate than most other goods, FannieMae, the government-backed mortgage provider, calculated that increased costs for shelter contributed 1.5% of the overall inflation rate because it makes up such a large share of overall spending.

Gotsch said rising prices are driving up auto insurer loss costs. Rising replacement costs for vehicles increases the amount that can be considered a total loss, requiring insurers to pay for more expensive repairs.

Some used cars are selling more than their owners paid when the vehicles were brand new. Iseecars, a used-car sales website, posted a list of 15 car models that are now more expensive that their original price: The Mercedes-Benz G-Class sold for $62,705 more than its original price, 35.6% increase.

The list wasn’t limited to luxury cars. The Ford Bronco Sport sold for 16.4% more than its average price new. The Toyota Tacoma sold for 12.2% more than new. The Hyundai Accent sold for 11.2% more than new, according to Iseecars.com.

Gotsch said much of the inflationary pressure can be traced to supply chain shortages caused by COVID-19 — for autos, that means computer chips. Shortages led to 11.3 million vehicles being trimmed from production in 2021, her report says.

Gotsch said the crimped supply of chips causes auto manufacturers to use the parts that they can obtain on their most profitable models, which reduces supply and of course increases prices.

Gotsch said historically, the used vehicle market has been refreshed with a steady supply of vehicles turned in by owners whose leases expired. She said more motorists are holding onto their leased cars because they cannot afford the price of an upgrade.

The National Auto Dealers Association reported that the average new car price surpassed $45,000 in January. Gotsch said those rising prices are putting new cars out of reach for many consumers, creating demand that has pushed up used car prices even more. The average used car price climbed to nearly $30,000, according to Gotsch’s report. She said cars more than seven years old saw the largest percentage price increase, increasing 30.2%.

Gotsch said most analysts predict that supply disruptions, including supplies of computer chips, will eventually ease and reduce inflationary pressure, but that will take some time. She said for the rest of year, auto insurers can expect to continue seeing the greatest increase in used car values since Superstorm Sandy in 2012.

Property insurers are facing similar inflationary pressures.

The National Association of Home Builders reported in November that prices of goods used in residential construction climbed 0.8% in October, after declining in the two previous months. Building material prices had increased 12.2% year to date, after increasing 4.5% during the same period in 2020.

Prices have also been erratic. Lumber prices reached a peak of about $1,500 per 1,000 board feet in June, dropped to $400 in September and jumped to $1,200 as of Feb. 4, according to the NAHB report.

Rising prices are already driving premium increases. CRC Group reported last week that in December, property insurance renewal costs increased 16% year-over-year. The wholesale and specialty brokerage said 84% of policyholders saw a premium increase.