Inflation, Storms, Social Inflation Drive Insurance Costs

Everywhere you go, neighbors and friends are talking about it: “Have you seen the increases in our insurance costs?” Yes, it’s true that costs are increasing throughout the economy, but what are the factors driving this increase? Politicians will cite corporate greed and other such gobbly-gook, but it is in fact the government who allows and sets the percentage of increase for all regulated insurance products. So if they allow for the increase, they clearly see factors beyond pay raises and corporate bonuses.

Three main factors are driving insurance increases, and the trends tell me that the pricing increases won’t abate any time soon: First, the sticky, non-transitory inflationary pressures on the economy have infected insurance markets. 2nd, catastrophic storms and losses have driven reinsurance markets away. Finally, a phenomenon called “social inflation” is upending decades-long expectations on loss payments and settlements.

Let’s dive into these three causes. Non-transitory inflation includes the cost of lumber, copper, steel, and other construction materials. When those are purchased at 40% above annual trend, due to the transitory spikes in fuel costs, they become permanent inflation. No craftsman will drop the price of materials even after fuel prices decrease. In other words, lumber purchased at 140% stays elevated until the last beam is sold. And once installed into your house after a claim, that cost is literally “built-into” the permanent cost of your home. According to Travelers, steel is up 65% and concrete and other building products are up 37%. It isn’t transitory, and it’s not going away anytime soon. So elevated building costs drive insurance rebuild pricing.

Catastrophic losses are driving reinsurers away from markets they have funded for decades. According to Travelers, in the last 4 years, these events have caused annual insurance losses of more than $100 billion globally. Reinsurance are large international entities that “insure” the insurance companies you and I purchase from. They are the backstop to catastrophic loss that prevents national carriers from bankrupting at each major storm. When they don’t find the insurance markets profitable, they send their money elsewhere. According to Travelers, the reinsurance markets have improved in 2023 and 2024, but the marketplace still remains tight.

Finally, there is “Social inflation.” Defined by Philadelphia Insurance Companies, as “a term used by insurers to describe rising costs of insurance claims resulting from things such as increased litigation, broader definitions of liability, more plaintiff friendly legal decisions and larger compensatory jury awards.” Post-Covid, early indicators show the trend for social inflation increasing and accelerating. Environmental pollution claims and construction time and budget claims are categories of litigation that have seen outsized jury awards that are not based on legal precedence or known practices of liability attribution. The net result for all of us is higher premiums, higher deductibles, and a pairing away of coverage forms with riders and exclusions.

The bottom line for you and me is that increased insurance costs are now a permanent feature of the American economy for the next 3-5 years. We must prepare and budget, and seek permanent solutions outside of insurance to control the top three drivers of these increases.