Rising inflation concerns can pose several difficulties in the commercial insurance market. Looking back, when prolonged inflation issues took place between the 1970s and 1980s, the insurance industry faced numerous consequences. Specifically, the commercial insurance market encountered reduced reserve levels, unpredictable claims trends and weaker underwriting performance—causing major losses for insurers and greater coverage challenges for policyholders.
It’s important to note that the insurance industry as a whole is currently better positioned to incur losses to its reserves when compared to previous periods of extended inflation due to outsized investment gains. Furthermore, advances in financial reporting processes have given insurers additional capabilities to identify and respond to loss trends. However, uncertainty surrounding how long existing inflation issues will last could eventually threaten the long-term stability of the insurance industry’s reserve levels and underwriting profitability.
Taking a closer look at specific lines of coverage, the following markets are at risk of being impacted by rising inflation:
- Commercial property—Within the property insurance space, the cost to repair or rebuild structures following a loss has soared, as worker shortages within the construction industry have led to increased labor costs. At the same time, supply chain issues related to various essential building materials caused the price of these items to skyrocket. In particular, the National Association of Home Builders reported that the costs of lumber and steel have more than doubled during the pandemic. Such inflation is further evidenced by the latest BLS data, which shows a substantial CPI increase over the past year for a number of structural elements—including floor coverings, window coverings, major appliances and overall construction materials. Amid elevated property loss costs, insurers may experience poor underwriting results, motivating them to increase policyholders’ premium expenses and introduce additional coverage restrictions. With heightened repair and rebuilding costs increasing overall claim severity, policyholders may also encounter potential underinsurance concerns following larger property losses.
- Commercial auto—In the auto insurance market, vehicle repair expenses and subsequent claim costs have surged. This trend is predominately caused by worker shortages in the auto industry generating elevated labor costs and supply chain disruptions for several critical vehicle parts (and vehicles overall), leading to higher prices for such items. These concerns are reflected in an increased CPI throughout the last year for auto parts, motor vehicle repairs and used cars and trucks, according to the BLS. Compounding claim costs, accident frequency and severity have jumped in recent years, emphasized by rising crash rates and increased medical treatment expenses. Similar to the property insurance market, elevated loss costs could lead to a decrease in underwriting profits for auto insurers. Especially in a market that has been largely unprofitable for the last decade, higher loss costs may cause auto insurers to heighten premium expenses and restrict coverage offerings for policyholders.
Although it’s currently making the most significant impact on the property and auto insurance markets, such prolonged inflation will likely begin to affect additional segments—such as the workers’ compensation and liability insurance spaces—over time. This means that insurers could face difficulties in maintaining insurance pricing to keep up with more volatile loss trends.
To prevent unanticipated loss costs and increased loss ratios due to rising inflation concerns, insurers may need to continue increasing overall premium expenses and making other coverage adjustments.