Inflation likely to force rise in home, car insurance rates

There really doesn't seem to be any good news about inflation for consumers on the horizon. Now, when they receive their homeowner and auto insurance renewal contracts this year, they're likely to find their rates have risen significantly.

It's hard to pinpoint exactly how much rates will increase because they vary by location. But analysts generally estimate the average increase will range between high single-digit to low double-digit percentages.

That may not sound like a lot, but analysts say this is just the beginning. Some expect such increases to come each year for the next few years.

"With the American consumer already strained by compounding inflation, a hike in their auto and home insurance policies will be most unwelcome," said Joshua Shanker, an analyst at Bank of America.

In the 12 months leading up to May, consumer inflation rose 8.6%, the fastest pace since December 1981.

Inflation, climate events boosting homeowners' insurance rates

A couple of things are combining to push homeowners' insurance rates higher, including the rise in extreme climate events over the past five years and inflation.

In 2021, the United States recorded 20 weather/climate disaster events with losses exceeding $1 billion each, according to the National Centers for Environmental Information. That compares with the inflation-adjusted 1980-2021 annual average of 7.7 events and the annual average for the most recent five years (2017–2021) of 17.8 events. Those are all losses that must be paid.

Insurers usually pass on some of these risks to reinsurers, but with the rise in catastrophic events, reinsurers are "saying enough is enough and raising rates," said Matthew Carletti, analyst at JMP Securities, a Citizens Company.

"So insurers have to pay more for that protection and are passing it on to consumers," Carletti said.

Also factoring into higher renewal rates is inflation that has soared to a 40-year high.

During the pandemic, not only did the housing market boom, but shortages emerged of everything from lumber to oil (used for things like asphalt and roofing products) and even workers to build, repair or remodel homes. All of that pushed up how much it would cost to rebuild a house in case of a disaster, a major factor in pricing homeowners' insurance.

"The cost of home repair and construction materials are not likely tochange simply because the price ofa new mortgage goes to 6%," Shanker said. "And, it would appearthat the underwriting margins, or lack thereof, for homeowners' insurance is the worst in a decade, if notlonger."

That's another reason for insurers to raise prices.

More inflation, need for speed drive on auto insurance rates

Auto insurance rates also are getting a boost from higher costs. Not only did the price of used cars soar during the pandemic for various reasons, including a limited number ofnew cars for sale and a strong preference for road trips while flying was restricted, but labor and parts prices also jumped because of shortages.

Couple that with more accidents occurring as vehicle miles driven reverted to pre-pandemic levels in spring, and you have a recipe for disaster.

"Suddenly, you have people with more expensive cars driving, and then they're driving like maniacs, and there are more accidents," Shanker said. "It is obvious that this has had a deleterious impact on (underwriting) margins in the personal auto market."

If I bundle home and auto,

can I get a break?

Unfortunately, price increases are coming to the bundlers too, analysts say.

Usually, insurance companies can raise the price of one at the expense of the other to keep bundlers, which tend to be more profitable over time because of their higher likelihood of staying with the insurer.

"Bundlers are likely to find that the price of their auto and home policies are rising in tandem, and the insurer has little ability to offset the increase with restraining the price of another part of the policy package," Shanker said.

He estimates bundlers could see a 10% increase in their renewal rates this year.

That "potential sticker shock for a lot of customers, for a lot of the best bundling customers, is going to drive them to shop for a better deal," he said. "These high-value, multi-policy bundlers rarely shop in great numbers."