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Inflation’s Impact on the Insurance Industry

The overall cost of doing business is rising for everyone due to inflation, and the insurance industry is no exception. Safety National’s President, John Csik, provides his insight into how carriers are reacting to its pressures.

August 26, 2022

Faced with the highest rising costs seen in decades, insurance carriers are strategizing to counter its potential risks. Safety National’s President, John Csik, outlines the effects of inflation on a carrier’s claims and expense costs in addition to how some carriers are adapting their operations.

Increased Claims Costs

The loss costs associated with claims are roughly 70-75% of overall insurance company costs. The industry has been confronted by compounding challenges, like social inflation, supply chain disruptions and labor shortages. A few lines of business facing these challenges include:

  • Commercial Auto, General, Umbrella and Professional Liability Social inflation is best illustrated by increasing jury awards, sometimes even extending into the billion dollar territory, that have drastically altered exposures for these lines. Insurance carriers pay the vast majority of such costs. Carriers writing these lines have implemented increased rates and restricted limits to mitigate overall exposures.
  • Auto Physical Damage and Property – Inflation is driving the costs of labor and supplies, resulting in expensive repair costs. Poor results have led personal and commercial line carriers to increase premiums to offset rising costs.
  • Workers’ Compensation – This line of business is less impacted by inflation. Premiums are established by charging rates against payroll levels; accordingly, rising wages result in increased premiums to carriers. State statutes set indemnity benefits paid to injured workers based upon the state average weekly wage. As inflation is incorporated into the average weekly wages due to the employee, the paid benefits increase, but typically at a lag to what has already been received in increased premium. The medical component of loss costs is subject to inflation, but medical inflation has been considerably less than the Consumer Price Index inflation rate in the past year. Most notably, inflation is causing investment income to perform favorably for carriers that provide workers’ compensation coverage above an attachment point. This is a welcome result for these carriers that could be paying out on certain claims for decades.

Increased Expense Costs

Typically, a carrier’s non-claim expense costs make up 25-30% of overall costs. Commission costs paid to brokers or agents, intermediaries and reinsurance ceding companies typically account for less than half of a carrier’s expenses. Commission expense does not typically rise as a percentage of premium during inflationary periods, since it is usually set as a percentage of premium or at a fixed dollar amount. However, the rest of the expense component, which consists of payroll and benefits, professional services, supplies, equipment, energy, travel and any additional overhead, is impacted by inflation. All carriers have been influenced by increased costs associated with these expenses due to an imbalance between supply and demand. An example is the wage inflation experienced by companies due to their difficulty in finding qualified candidates to fill open positions in today’s job market. Supply chain disruptions have created more uncertainty around acquiring organizational needs, including essential supplies, like technology hardware.

How Carriers Are Adapting

While the industry is facing rising costs, there are measures that can reduce costs. Personal line carriers have utilized technology for claims assessments, like drones that survey hail damage or apps that can provide estimates on auto physical damage via photos and artificial intelligence. These advances provide a quicker and cheaper method than sending out claims adjusters or agents. While there are more options for automation in common lines of peril than complicated lines, almost all carriers are investing in technology solutions to improve efficiency. For example, companies are investing in robotic process automation to automate routine tasks, improving efficiency and freeing staff to work on more complex and rewarding tasks.