The insurance industry is feeling the impact of high inflation. Claim costs are increasing as a result of supply shortages and higher material prices. Higher repair and replacement costs, along with longer cycle times, are increasing claim severity. Carrier expenses are also escalating across their organizations. To survive inflation, insurers need to lower loss ratios and increase revenue.
Soaring Inflation Rates
The U.S. Bureau of Labor Statistics (BLS) says that the Consumer Price Index for All Urban Consumers (CPI-U) increased 8.5% in the twelve-month period ending March 20221. This is the largest increase since 1981. Prices for certain items have increased at even higher rates. Energy costs have seen inflation spikes of 32%. In April, the CPI increase reached 8.3%2 – slightly lower, but still remarkably high.
It's not just the Consumer Price Index that’s increasing, either. The Producer Price Index has also seen increases. BLS says that final demand prices increased 11% for the 12-month period ending in April 20223.
Building materials have seen substantial price increases and fluctuations. The National Association of Homebuilders says that building materials prices increased 20.4% year-over-year as of March 2022 and prices have increased 33% since the start of the pandemic4.
According to Michel Leonard, the head of the Data and Analytics Department at the Insurance Information Institute, replacement costs have been rising around 16% annually for insurers, close to twice as fast as the Consumer Price Index. Leonard expects that annual inflation for replacement costs will still be at 12% to 14% at the end of 20225.
The Causes of Inflation
Supply chain issues, production shutdowns and labor shortages have contributed to recent price increases and material shortages. Some of these factors are caused, directly or indirectly, by the pandemic, but that isn’t the only issue.
Natural disasters have also played a role. Natural disasters can reduce production, labor availability and supplies while increasing demand, contributing to price hikes. According to the National Oceanic and Atmospheric Administration (NOAA), the U.S. experienced 20 separate nature and weather disasters with losses of more than $1 billion in 2021. The number of billion-dollar disasters has increased in recent years, and total losses from these events came to $145 billion in 2021.6
Fatal traffic crashes have also increased. The NHTSA says that traffic fatalities reached 31,720 in the first nine months of 2021, an increase of about 12% compared to this period in the previous year.7 At the same time, car repairs have become more costly due to more sophisticated auto tech and the ongoing shortage of microchips.
The Impact of Inflation on Insurance
Rising costs have had a noticeable impact on insurance. Rising building and auto material costs equate to higher repair and replacement costs for property damage claims. Supply chain issues and labor shortages, along with along with higher property and car rental prices, affect claim severity. Businesses and consumers have less money to spend and are more apt to shop around, reduce coverage, or let coverage lapse.
And since insurance premium rate increases not only require regulatory approval, but can negatively impact both customer retention and acquisition, they are definitely not a silver bullet for insurers. Rate hikes may not be even enough to keep up with inflation.
According to the American Property Casualty Insurance Association8, insurers are struggling to keep pace with inflation and private U.S. property and casualty insurers faced an $11.3 billion net underwriting loss in the third quarter of 2021.
How Next-Gen Technologies and Process Optimization Can Help
As insurers continue to grapple with the effects of inflation, it’s clear that new strategies are needed. To stay competitive, insurers need to lower loss ratios, increase revenue, reduce expenses, and achieve operational efficiencies that improve customer experience. By leveraging next-generation technologies, payment optimization and digital process transformation, insurers can significantly improve their loss ratios.
In what ways? Digital customer engagement and network tokenization can both be powerful tools for customer retention and persistency. Network tokenization provides insurers even greater benefit by offsetting interchange rate increases and boosting payment authorizations. Automated billing system reconciliation workflows can improve operational efficiencies, reduce administration expenses and even enhance customer experience. And digital approvals and claim payments reduce cycle times, lowering adjudication costs and reducing claim severity.