Inflation baked into 2023 insurance rates

The US inflation rate dropped to 6.5% in December 2022, according to the Consumer Price Index (CPI) from the U.S. Bureau of Labor Statistics (BLS), from 7.1% in November. This is a slight drop compared to the 7.0% reported in December 2021, and 3.9% in 2020. Lasting economic effects from Covid, supply chain disruptions, changes in employment and the war in Ukraine have contributed to this rise in inflation over the last few years, though this past December is the sixth consecutive month of deceleration since June 2022.

However, that's not changing sticker shock for insurance policyholders getting renewals for auto and home coverage. Building materials for homes were more expensive, a chip shortage increased the price of new vehicles and auto repairs and labor shortages in the auto industry increased both home and auto repair costs – ultimately increasing premiums.

Auto insurance
According to the BLS' new vehicle index, a section of the CPI, the 12-month percent change in December 2022 totaled to 5.9%, a drop from the 7.2% we saw in November. Adding to supply chain issues for new vehicles and rising costs for auto parts, the technician talent shortage continues to slow down auto repair processes. The TechForce Foundation 2022 Technician Supply and Demand Report shows a continuation in the multi-year decline, with a 0.7% decrease in total employment of collision repair technicians this year.

The chip shortage continued throughout 2022, resulting in more of the inflated vehicle and repair costs seen in 2021. The increase in demand for vehicle parts, with issues in the supply chain, also adds to the rising cost of vehicles and repair process. 

In October 2022, the American Property Casualty Insurance Association (APCIA) published data in its paper, "The New Normal? Auto Insurers Continue to Struggle with Inflation," and states, "Rapid increases in inflation continue to drive up auto insurance losses and combined ratios. Insurance claims inflation has continued to rise faster than the underlying consumer price index, far outpacing increases in premiums."

To ease rising rates for policyholders, some insurers are offering discounts through usage-based insurance and personalized telematic data. TransUnion's "Personal Lines Insurance Trends and Perspectives Quarterly Report," published in May 2022 for the second quarter results shows a boost in telematics adoption from consumers, with a rise from 49% to 65% of customers opting for a telematics policy.

Homeowners insurance
The Policygenius Home Insurance Pricing Report, published in July 2022, finds that 90% of American homeowners experienced an increase in their quoted annual premium from May 2021 to May 2022 with an average increase of $134, and premiums were up by 12.1% in May 2022 compared to the previous year.

Allstate shared its financial results for the third quarter of 2022 in November, and a press releases states, "Allstate brand net written premium increased 14.3% compared to the prior year quarter, driven by average premium increases of 13.3% due to inflation in insured home replacement costs and implemented rate increases, combined with policies in force growth of 1.6%."

In the Travelers Institute webinar, "Inflation, Interest Rates and the State of the U.S. Economy: A Conversation with Neel Kashkari, President and CEO of the Federal Reserve Bank of Minneapolis," held on October 19, 2022, Kashkari shares his thoughts on rising interest rates and the state of the economy.

"We know the way interest rates work, it affects certain sectors of the economy sooner than it affects the rest of the economy. So these big-ticket items that people generally have to borrow money for a house or a car, we know it affects those sectors right away. Mortgage rates have gone from around 3% for a 30-year mortgage to 7% more recently. That is having a profound effect on buyers who would go get a mortgage," says Kashkari.

The Homeowners Insurance Preparedness Report, released by Goosehead Insurance Inc., surveyed 2,000 homeowners in the United States and reports that some homeowners are opting for less coverage due to inflation and rising prices – 57% of homeowners, in order to save money, would choose less coverage in their home insurance than what is recommended, and 31% responded that shop for the least expensive insurer possible. 

Brian Pattillo, VP of strategy at Goosehead Insurance, writes to Digital Insurance, "Inflation is affecting every facet of our lives, including home insurance. Because of the increase in cost of materials and labor, insurance premiums are forced to adjust to keep pace with the additional funds that will be paid in a claim situation. As a result, a huge change has occurred in how consumers think about and shop for their home insurance."

Just over half of homeowners, 52%, have learned that they were paying more for coverage than was necessary, according to the report, and 76% of respondents also say that they would change their coverage if they discovered they were paying for more coverage than they needed. 

"To ease the financial burdens many homeowners are facing, insurers should instill confidence in their clients by equipping them with the knowledge and insights needed to make informed decisions while also providing a more simple and streamlined selection process," writes Pattillo. "Independent agents can also emphasize the value of shopping around to find the best home insurance for their client's needs. While it's natural for consumers to want to stick with the carrier they are familiar with, other carriers may be able to offer the same (or better!) coverage for a better price. The ability to provide a variety of quotes is especially key in this market. Independent agents may also be privy to useful discounts that consumers are unaware of, such as private flood insurance options or packaged savings."