4 Major Factors Influencing Rising Insurance Rates in the US

Buyers of practically any sort of property/casualty insurance coverage — home, auto, business — are well aware that premiums are rising, regardless of whether claims have been filed.

People may have also heard of major insurers withdrawing from specific areas and/or lines of business as their losses mount and their earnings fall.

The causes of increased insurance rates are numerous and diverse, but four major elements are at work according to Insurance Journal: economic inflation, social inflation, weather, and reinsurance costs.

In June 2022, inflation reached a 40-year high of nearly 9%. It has since slowed, but insurance premiums cannot be adjusted in real time. Rate-change filings with state insurance departments are typically done once a year (car rates are often reported every six months). Some business rates are normally filed only every three to five years.

Building material costs have climbed 39% since the beginning of 2020, while the Consumer Price Index of auto parts outpaced that of auto insurance rates by 25% between January 2020 and January 2023, resulting in massive U.S. underwriting losses for personal auto insurance. All of this means that claims to replace or repair buildings and automobiles are becoming more numerous.

However, another sort of inflation is at work: “social inflation.” It’s a word used to describe the rise in claims expenses that outpaces economic inflation. Its primary reasons include growing litigation and rising settlement costs (also known as “nuclear verdicts”), both of which are based on the insurance industry’s impression of having big funds.

However, all pockets have a bottom, and these losses are ultimately absorbed by policyholders through higher insurance rates.

In addition to a difficult financial environment, the actual climate has not been kind to insurers. Changing weather patterns continue to produce more – and more catastrophic – weather events, resulting in growing losses for property/casualty insurers.

Derechos, tornadoes, and hail have been particularly damaging in the Midwest. The National Weather Service confirmed well over 100 tornadoes in Illinois, Iowa, Missouri, Minnesota, Ohio, and Wisconsin alone in December 2021; more than 60 of those affected Iowa. And, in recent years, a series of derechos have swept across the same terrain, sparked by the August 2020 storm (dubbed the “Heartland Derecho”), which caused $11 billion in wind, rain, and hail damage. Those record-breaking damage costs were borne by insurers.

As a result, inflation and extreme weather have had a cascading effect, raising the cost of reinsurance – insurance for insurance firms. This resulted in large reinsurance rate increases in January of this year, as well as market tightness. Reinsurers, like primary insurers, have withdrawn from certain markets, leaving carriers with few options at considerably higher pricing for their own insurance coverage.

The simple conclusion is that many property/casualty firms are paying more for reinsurance, paying more claims for more money, and failing to collect enough premium to cover those expenses.

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