Inflation Squeezes Homeowners, Commercial Property Insurers, Moody’s Reports

Higher costs for construction materials and labor have caused elevated loss severity for
homeowners and commercial property insurers, which will lead to higher ex-catastrophe
combined ratios over the course of 2022, Moody's Investors Service reported. Insurers are raising coverage levels and rates, but generally not sufficiently to cover higher construction costs. Catastrophes will also continue to shape results for these lines over the course of 2022.

Construction costs have risen sharply since 2021 and remain at elevated levels.
Construction material costs have increased 26.7% and construction labor costs have
increased 5.5% over the first four months of 2022 compared to the prior year period,
according to government data. Rising construction costs are credit negative for homeowners
and commercial property insurers because they drive up repair and rebuilding costs.

Homeowners and commercial property insurers raising coverage and rates to counter
inflation. In response to rising construction costs, insurers are raising coverage levels and
rates. Insurers are likely to increase coverage levels over several years rather than all at once
in order to temper the impact on customers. According to Moody's annual survey of rated P&C
insurers, homeowners insurers expect to increase rates by about 7% in 2022, compared to
the 3%-5% yearly rate increases recorded since 2015. Commercial property insurers expect
to raise pricing by about 6.5% for 2022.

Inflation raising combined ratios in 2022. Combined ratios for homeowners and
commercial property insurance are largely determined by the extent of catastrophe and
other storm losses in a given year. In Moody's base case for homeowners for 2022, 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, Moody's expects combined ratios to rise (deteriorate) by about 2.5 points. The combined ratio impact could increase to 5 and 7.5 points in Moody's downside and stress cases, respectively.

Insurers remain well capitalized, although catastrophes remain a key risk. Moody's said its rated insurers have ample capital to withstand potential underwriting losses in homeowners and
commercial property lines stemming from inflation. In addition, insurers actively manage
catastrophe risk through a combination of exposure limits, other underwriting initiatives and
reinsurance. For the first quarter of 2022, US homeowners and commercial property insurers reported strong results helped by low catastrophe losses.