Rising insurance rates guest editorial
October 11, 2023 | Jeff Menary, President and CEO, Grinnell Mutual
It’s no secret to buyers of almost any type of property-casualty insurance policy — home, auto, business — that rates are rising, regardless of whether claims have been submitted.
People may also have heard about major insurers who are pulling out of certain states and/or lines of business1 as their losses grow and their earnings shrink.
The reasons for rising insurance premiums are many and varied, but four key factors are contributing: economic inflation, social inflation, weather, and reinsurance costs.
Inflation peaked in June 2022 at over 9 percent, a 40-year high. It has since decelerated, but insurance rates can’t adjust in real time. Rate-change filings with state insurance departments are most often an annual process (auto rates are generally filed every six months). Rates for some types of business are typically filed only every three to five years.
Building material costs have increased 39 percent since the beginning of 20202, and between January 2020 and January 2023, the Consumer Price Index of auto parts3 outstripped that of auto insurance rates4 by 25 percent, leading to huge U.S. underwriting losses for personal auto insurance. All this means that claims to replace or repair buildings and autos are larger.
But there’s another type of inflation at work — “social inflation.” It’s a term used to explain the rise in claims’ costs that exceed those of economic inflation. Its main causes are increased litigation and escalating settlement costs (aka “nuclear verdicts”), both based on a perception that the insurance industry has deep pockets. But all pockets have a bottom, and ultimately these losses are borne by policyholders through increased insurance premiums.
In addition to a challenging financial climate, the actual climate has not been kind to insurers. Changing weather patterns keep producing more — and more catastrophic — weather events, which in turn lead to mounting losses for property-casualty insurers.
The Midwest has been especially hard-hit with derechos, tornados, and hail. In December 2021 alone, the National Weather Service confirmed well over 100 tornados in Illinois, Iowa, Missouri, Minnesota, Ohio, and Wisconsin; more than 60 of those hit Iowa.5 And, a series of derechos has stomped across the same territory in the last few years, kicked off by the August 2020 storm (the so-called “Heartland Derecho”) that did $11 billion worth of damage in wind, rain, and hail. Those record-setting damage costs fell to insurers.
In turn, inflation and severe weather have had a waterfall effect, driving up the costs of reinsurance — insurance for insurance companies. This resulted in massive reinsurance rate increases in January of this year, along with a tightening of the market.6 Like primary insurers, reinsurers have also pulled back in certain markets, leaving carriers with limited options at much higher prices for their own insurance coverage.7
The bottom line is that many property-casualty companies are paying more for reinsurance, paying more claims for more money, and not taking in enough in premium to balance those costs.
For any type of business, spending more than it earns is untenable in the long-term.