APCIA: Inflation Outpacing Premium Increases for Auto and Homeowners Lines

US Insurers — already hammered by extraordinary losses caused by natural disasters — are also failing to raise premiums at a pace that matches an historic inflation rate, the American Property Casualty Insurance Association said Friday.

APCIA said private property and casualty insurers experienced an $11.3 billion underwriting loss in the third quarter of 2021. Incurred losses and loss adjustment expenses increased by 17.8% during that quarter, compared to the prior year. Yet direct written premium increased only 3.1% for auto and 8.4% for homeowners.

The claims inflation rate far surpassed the 7.5% increase in the Consumer Price Index that the Bureau of Labor Statistics announced in January, which was the highest inflation rate in 40 years.

APCIA issued two reports on Friday that explain how rising costs are impacting the personal auto and homeowners lines.

For auto, inflationary pressure is increasing the cost of repairs, car rentals and vehicle replacements. At the same time, the volume of traffic has roared back and was within 1% of pre-pandemic 2019 levels for six of the final seven months of 2021, according to Department of Transportation data.

But motorists apparently acquired bad habits during the pandemic, causing increases in claim frequency throughout 2021. According to the National Highway Safety Administration, the vehicle crash fatality rate jumped 12% in the first nine months of 2021 compared to the same period in the prior year, to 1.36 deaths per 1 million miles driven.

“Since the start of the pandemic, Americans have embraced riskier driving behavior, such as impaired driving, speeding, and failure to wear seatbelts,” stated Robert Passmore, vice president of auto and claims policy for APCIA. “This concerning trend is leading to more crashes at a time when the cost of medical care and vehicle repairs are escalating.”

For the homeowners’ line, skyrocketing increases in building material costs follow a two-year spree that saw the highest natural disaster losses in history — $176 billion 2020 and 2021. According to a report by Aon, 2021 was the fourth most extreme catastrophic loss year in history.

At the same time, home construction increased to the highest level since 2006, rebounding after a short pause during the COVID-19 lockdowns in early 2020. The demand to build new homes while also replacing homes damaged or destroyed by floods and wildfires in the past two years pushed up the cost of lumber. An analysis by the National Association of Home Builders in January found that the aggregate cost of residential construction materials has increased almost 19% since December 2020. Shortages caused by supply chain bottlenecks in the supply chain exasperate the upward pressure on prices, the report says.

Price increases lead to higher claims costs. According to AM Best, the homeowners multi-peril direct losses incurred increased 40.3% over the last two years, including a 13.9% sake in the third quarter of 2021 compared to the same period of 2020.

“Insurers are strongly encouraging property owners to harden their homes and businesses to reduce potential loss and damage,” stated Karen Collins, assistant vice president for APCIA. “In addition, during the current cycle of extreme inflation, policyholders are encouraged to make sure they have enough insurance and are financially prepare should disaster strike.”