Insurance claims inflation rose faster than the underlying consumer price index (CPI), greatly exceeding the rate of auto insurance premiums, according to a study released July 21, 2023, by the American Property Casualty Insurance Association (APCIA).
The study, “Auto Insurance: The Uncertain Road Ahead,” reported that rapidly rising overall U.S. inflation, combined with increases in auto-insurance claims inflation led to higher insurance losses and combined ratios.
The U.S. Bureau of Labor Statistics on October 12, 2023, reported the CPI rose 0.4% in September on a seasonally adjusted basis, after increasing 0.6% in August. In the last 12 months, the index increased 3.7% before seasonal adjustment.
“In addition to inflation trends, the private passenger auto insurance sector is also experiencing several other trends such as increased frequency and severity of claims cost, riskier driving behavior by the public, cost increases for medical and hospital services, and outsized growth in lawsuit verdicts and legal system abuses, that are negatively impacting and pressuring the industry with increased losses,” said Robert Passmore, department vice president for APCIA and co-author of the paper.
The study found that:
• Losses on underwriting in 2022 for private U.S. property casualty insurers totaled $25.6 billion, more than twice the losses the previous year and the worst result of 2021.
• Private passenger auto insurance witnessed the highest direct loss ration among major lines of business at 80.2% (not counting loss adjustment expenses) in 2022, a 12.2-point increase from 2021 and 24.1 points from the “low-water mark of pandemic-impacted 2020.
• U.S. private passenger vehicle damage claim severity — the average cost per claim for property damage liability and collision – jumped nearly 50% from 2018 to 2022, an increase driven by higher auto repair and labor costs, inflation and theft rates, among other factors.
• Property casualty insurers’ premiums for personal vehicles rose 6% for the year, less than the 24-percent rate of escalating losses.
• The U.S. Bureau of Labor Statistics’ “Motor Vehicle Insurance CPI” includes goods and services auto insurers require to settle claims. In June that figure rose 6.0% year-over-year, in increase from the 4.5% increase in May, representing sixth-straight monthly increase.
“All indicators suggest elevated auto repair and replacement costs will stretch well into 2023 and potentially beyond,” Passmore said. “Medical inflation is also accelerating. Although insurers continue to monitor the situation closely, as claim costs continue to rise, insurers may be forced to pass these loss costs along to policyholders.”
According to APCIA, insurers strongly recommended drivers to minimize risk by avoiding risky driving behaviors that may result in a loss.
Insurers also advocate better infrastructure, including reliable supply chains for critical auto parts and safer roads, which should lead to fewer accidents and lower claims coasts keep insurance premiums affordable for consumers.