Inflation hits the insurance industry with no letup in sight

Insurers were generally slow to raise rates and premiums as inflation blossomed and bloomed over the last year or two. But that is now changing. Premiums for auto, health, life and homeowners policies are climbing, some at a higher speed than the current inflation rate. And experts say they see no letup in sight.

Inflation with its effects on premiums is “the topic of conversation among our clients within the industry, among boards of directors and a lot of the executives that we speak to,” said Marlene Dailey, financial services senior analyst with RSM US. “I’ve attended a lot of conferences where this is the main topic of discussion, specifically for middle-market carriers.”

Research by Bankrate shows that the average cost of car insurance likely will rise for many drivers this year. Several major auto carriers — including Allstate, Progressive, Geico and State Farm — increased rates in late 2021 or early this year in many states. Allstate and its subsidiaries, for example, have had at least 41 rate increases approved since the fourth quarter of 2021. The increases have varied from around 3% to less than 12%, according to S&P Global Market Intelligence.

Although they seem to be more than making up for lost time, insurers say the delay in reacting to spiraling inflation rates was mostly a factor of forbearance during the pandemic. Some auto insurers even offered rebates and supplements during the height of the pandemic because people weren’t driving. However, that is changing rapidly.

“The overall cost of doing business is increasing for practically all companies in the U.S., including insurance companies,” said Steve Ellis, assistant vice president and claims field manager for Bankrate. “And because the ‘cost of doing business’ is part of the calculation of premiums, consumers can expect, in general, higher premiums in 2022.”

The forces pressuring rate increases are the same as those pushing overall inflation: labor shortages; supply chain disruptions; rising costs of goods and services, particularly healthcare and auto costs; geopolitical factors; wage increases; and lifestyle changes brought on by the pandemic.

Moreover, there has been an uptick of dangerous driving as the pandemic has lessened, with a record number of fatal accidents contributing to rising premiums.

“People are driving more and, obviously, the more you drive, the more likely you are to have an accident,” Dailey said. “And cars are more expensive. With supply chain issues, there are problems of getting parts and shipping delays. All of this is putting inflationary pressures on the industry.”

And with all the innovations in auto technology and safety features, more people are surviving serious accidents, which leads to higher medical costs.

“There are some indications that claim cost inflation is leveling,” Dailey said. “And we are seeing a slight decline in auto parts costs. But the price to repair autos continues to rise.”
According to Bloomberg, auto repair costs since 2019 are rising at an average rate that is twice as high (at 4.9%) as the 2016–2019 average rate (2.3%).

Technology comes at a cost

While technology, such as advanced driver assistance systems in newer vehicles that help navigate and park more safely, provides improved protection, it also comes at a higher cost when repairs or parts are required, Dailey noted.

“For the near term, this means that these tech-enabled automotive parts will be more expensive to repair or replace in the event of an insurance claim,” she said. “For instance, the traditional private passenger windshield claim typically costs less than $500. However, many of the tech-enabled capabilities and sensors designed to protect you are located right behind or within the windshield. Estimates to recalibrate this technology can cost between $1,000 and $1,500 on top of the typical replacement cost, depending on the manufacturer.”

In addition, new tech-enabled vehicles require new skill sets and training, she said. For repairers or auto insurance appraisers, this requires an investment in technical training programs and certifications that focus on requirements to meet the rapidly changing needs of the industry.

Labor issues plague the industry

Yet, of all the overriding factors pushing insurance rate increases, Dailey is most concerned with the labor issues facing companies.

“Having been in the industry for 20 years, I think this period shows the most serious labor and skills shortage,” she said. “We’re at a point where baby boomers are leaving the industry. And you have digital natives entering the industry who don’t have the knowledge and skill set of somebody who’s been there and can handle severe claims, litigation, D&O and very complex claims issues. They’re leaving, and it’s difficult to replace those skills, or get all of that knowledge or up-skill and retrain and attract this new talent. Let’s face it, insurance isn’t sexy and it’s not the first thing that millennials are interested in.”

“Having been in the industry for 20 years, I think this period shows the most serious labor and skills shortage.”
— Marlene Dailey, financial services senior analyst with RSM US

Surveys support that opinion. Nearly 400,000 employees are expected to retire from the insurance industry within the next few years, according to the U.S. Bureau of Labor Statistics.

The crisis facing insurers, according to some, is a growing lack of interest in insurance as a career path. Eight out of 10 millennials say they have limited knowledge and understanding of the employment opportunities available in the insurance industry, according to a survey conducted by The Institutes. In addition, 44% of millennials do not find a career in insurance interesting, according to Valen Analytics, even though insurance can offer opportunities in marketing, finance, data analysis and information technology — things that should appeal to the millennial generation.

A report by Amtrust Financial Services blames the lack of interest among millennials on the fact that many have put off homeownership or buying a car, and thus haven’t had much experience with insurance, despite the industry’s moving trend in adopting new technology and social media.

”More and more insurers are realizing they have to get better and faster access to data,” Dailey said. “They can no longer sit on legacy systems and have to use these data-driven insights to augment the shortage with labor and skills. Now we’re seeing more and more a sense of urgency on how they make that transition.”

But the huge investment in technology won’t initially decrease pressure on costs and rising premiums, she said.

Meanwhile, US employers expect group health plan premiums to rise an average of between 4.7% and 5.2% this year, despite cost-management initiatives, according to recent employer surveys. Overall costs for health claims are also expected to rise, health insurers forecast. Premium increases in 2020 and 2021 were the smallest in decades as many people deferred nonemergency care and turned to telemedicine during the pandemic, according to a report from Willis Towers Watson.

Employers are not expected to increase their workers’ share of coverage this year, according to Mercer’s Survey of Employer-Sponsored Health Plans. On average, Mercer reports, employees will pick up 22% of total health plan premium costs, unchanged from 2021. However, Mercer’s survey was conducted before the record rise in inflation this year.

On the homeownership front, homes valued at less than $1 million saw an average insurance rate increase of 5.3% in the first quarter this year, while houses valued at more than $1 million saw a 7% increase during the period, according to a report from MarketScout.

Increases reflect higher rates than the previous quarter, which saw rates for homes valued under $1 million increase by 3.7%, and 6.3% for homes valued at more than $1 million, according to the report.

“Insurers can be hurt in many ways by inflation,” according to a report by Conning. “Inflation impacts the real (adjusted for inflation) values of the portfolio, income and returns. The impact on liabilities can be more complex, and it can have greater effect on insurers with longer tail risk.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].