What the latest inflation measures mean for insurers

Several inflation drivers have increased claims costs for insurers since 2020, but some are less aggressive than expected and a few have yet to register significant impacts, a June report from AON found.

Insurers can expect it to cost more to find a replacement vehicle for a car insurance claimant, thanks to rising costs for used (up about 25% over the past year) and new cars (up 6% over the same period). And higher parts prices are making repairs more costly.

“Vehicle inflation has been driven by changing demand patterns, the computer chip shortage, and broader supply chain issues,” the report noted.

But inflation’s had less of an impact on auto liability payments because those costs are driven by overall wages and healthcare costs, both of which have lagged general inflation trends over the past 12 months.

Insurers will, though, need to keep an eye on rising construction costs being driven by both spiking materials prices and labour shortages.

Since early 2021, the index measuring producer prices for construction materials has run ahead of the Consumer Price Index, said Jason Machtinger, AON’s senior vice president of analytics and actuarial. The cost of building materials is currently showing a 14% annual inflation rate, with some variation by building type, he added.

Aon’s property cost index – which accounts for proxies for building and contents, including inherent labour costs – is now ranging between 9% and 11%. Currently, it’s higher for personal property than commercial property.

“Every portfolio is different and company management needs to monitor their individual situation closely,” Machtinger told CU. “Insurers should be keeping a close eye on their insured values, whether through their automatic insured value indexes or through running their portfolios through value calculation tools.”

Wage levels, especially for skilled workers, have been accelerating more quickly since April, but are still lagging the consumer price index, AON’s report noted. Since property loss trends lag prices, it added, the entire effect of inflation on loss may not be reflected until later.

Machtinger said insurers could shift from dollar deductibles to percentage deductibles to provide a further inflation guard.

“Careful attention needs to be paid to rate adequacy, while taking care not to double-count inflation by over-inflating rates when insured values are being adjusted,” he added.

“By and large insurers cannot make these adjustments mid-term, unless the policyholder is making changes – whether through endorsements, adding/subtracting locations to policies, etc., which would give the opportunity to more accurately recalculate insured values.”

Feature image by iStock.com/alexsl