Inflation Starts to Hit Auto and Home Insurers

Investors hunting for signs of inflation pressure should keep an eye on something they might not usually think about: the cost of insuring a car or home.

Last year insurers were often lowering premiums for auto customers who were driving a lot less and therefore getting into fewer accidents. Now, as life in the U.S. begins to return to normal, consumers’ motor-vehicle insurance costs are again rising. The recent U.S. consumer-price index update had that component up 6.1% in April from a year earlier, ending a long string of decreases and jumping the most since 2018.

The question for insurers is whether premium increases will be big enough. Part of the cost of covering a claim to repair or replace a car or home is under pressure. Factors include the global chip shortage, the scarcity of rental cars and the increased price of lumber and other building materials. The consumer-price-index measure of vehicle-repair costs has been on the rise.

At the same time, it is unclear how quickly people will return to their old driving habits and what that will do to accident frequency. Perhaps they still aren’t driving to work as often. But are they taking a lot more road trips?

Progressive

PGR -1.69%

said earlier this month it was monitoring such things as the pace of people returning to the office, lumber prices and the chip shortage. The company’s April underlying ratio of accident-year, noncatastrophe loss and loss-adjustment expense to net earned premium was about 70%, higher than about 67% during the prior month.

There are some long-standing trends that could come to the foreground for insurers as the pandemic wanes. Fitch Ratings earlier this month noted long-term challenges in the severity of losses for commercial auto coverage, such as more sophisticated technology and components within vehicles that make repairs and replacement more costly. Insurers have also been trying to keep up with another kind of inflation, the so-called social inflation marked by higher jury awards.

Some of these price increases might be only transitory. Historically, cost surges can still sometimes hit businesses such as homeowners insurance. Ryan Tunis of Autonomous Research noted that a 2009 jump in ratios of losses and expenses to premiums for home policies was largely attributable to a jump in construction costs. For some types of policies, such as home and auto, sustained inflation can be priced into renewal terms. There are, however, also businesses for which premiums collected today have to cover years of possible future claims. If persistent wage inflation occurs, for example, it could hit commercial policies such as workers’ compensation, according to Mr. Tunis.

Meanwhile, coming Atlantic storm season activity is expected to be above average, according to forecasts by Colorado State University hurricane researchers.

So even as premium rates rise, there could still be pressure on profitability from increases in both frequency and severity, particularly if rebuilding costs are unusually high.

U.S. property-and-casualty insurance stocks largely did better than banks and many other financials in 2020, though banks have mostly surged ahead this year. Like banks, insurers would also benefit from higher yields in their investment portfolios, and generally rising prices could help extend the so-called hard market of higher policy pricing. But they might be in for a bumpier ride for now.

At The Wall Street Journal’s CEO Council Summit, Janet Yellen expressed her confidence that the U.S. economy and employment will return to normal by next year. (Video from 5/4/21)

Write to Telis Demos at telis.demos@wsj.com

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Appeared in the May 25, 2021, print edition.

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