10 Oct Factors Affecting Rising Insurance Costs

Insurance rates are based on a variety of factors, including what’s happening in the economy and business marketplace. For example, today’s strong labor market drives higher wages, which impact the cost of goods and services across all industries. In addition, driver mileage and accident frequency and severity have increased, and legal system costs are rising, which is evident in higher litigation rates and liability settlement amounts. These factors contribute to increasing property and liability claim costs, requiring insurers to raise rates. This informational guide highlights factors contributing to rising insurance costs and the customer impact.

FACTORS IMPACTING INSURANCE PREMIUM RATES

INFLATION:

Economic inflation directly impacts insurance claim repair and recovery costs, including:

• Building Material and Labor Costs – While the inflation rate for some building components, has moderated in recent years, lumber prices are still 30% above year-end 2019 Concrete material costs have increased by 12% over the past year, and paint, interior trim, and drywall materials had modest cost increases in 2023. At the same time, construction labor costs continue to increase at a high rate, up 6.2% from January 2023 to January 2024.
• Vehicle Repair/Replacement Costs – Labor and materials shortages and the complexity of the high-tech systems in newer vehicles combine to make repairs more expensive.  Used-car pricing has moderated over the past year but remains up 35% compared to January 2019. Post-accident car repair costs have continued to increase (up 6.5% over 2023 levels), driven by higher auto body wages.
• Medical Costs – Persistently elevated inflation pushes hospitals and medical providers to increase the cost of care and spending on staff training and retention efforts. Healthcare worker strikes can also result in salary increases that are passed on to consumers, including their insurers.
• Wage/Labor Costs & Shortages – A tight labor market continues, as demonstrated by the March 2024 unemployment rate of 3.8%, which puts upward pressure on wages. It also creates potential safety issues, with companies more willing to hire less experienced or untrained workers, impacting business operations and workers compensation claim rates.

SOCIAL INFLATION:

Changing societal attitudes and increased mistrust of businesses and other institutions lead to increased litigation and impact insurance affordability and availability across the country. Practices like insurance bad faith standards, time-limited demands, assignment of benefits, and third-party litigation funding are driving up costs associated with engaging in our country’s civil justice system.

• Litigation Costs – More than $2.4 billion was spent on more than 26 million local legal services advertisements in 2023 to attract clients, according to the American Tort Reform These advertisements are the leading cause of consumers engaging lawyers and suing for their losses. When cases go to trial, it increases attorney involvement, extends the claims settlement process, and increases claims costs.
• Third-Party Litigation Funding – Investors with no relationship to the consumer are financially supporting litigants in exchange for a portion of the settlement or jury award. Their tactics, including discouraging injured parties from settling and encouraging aggressive and prolonged litigation, drive up litigation expenses and create precedents for future litigation.

WEATHER-RELATED CHANGES:

Weather-related losses have increased in frequency and severity as rising global temperatures contribute to the uncertainty surrounding catastrophic weather events.

• Catastrophes – Hurricanes, tornados, hail, wildfires, freezes, floods, and other unpredictable events have led to significant losses. Even without a major hurricane making landfall in 2023, natural catastrophe losses in the S. were approximately $65B, excluding Crop and Flood insurance. The average industry catastrophe losses from 2019 to 2023 were 45% higher than those from 2014 – 2018.
• Severe Convective Storms – Tornadoes, hail, severe thunderstorms, and derechos are among the most common and damaging natural catastrophe types in the S. In 2023, losses from these storms in the U.S. reached a record high of $56B, well above average for the prior ten years.

BEHAVIORAL CHANGES:

There are more vehicles on the road and an increased incidence of negative driving behaviors:

• Miles Driven – Miles driven have returned to pre-pandemic According to the Federal Highway Administration, cumulative travel for 2023 increased by 2.1% – or 67.5 billion vehicle miles. More miles driven increases the number of accidents per year.
• Distracted Driving – Distracted driving accidents result in approximately 3,000 fatalities each year, with no change in According to a Selective and Advocates for Highway and Auto Safety study, 7 in 10 licensed drivers admit to using mobile devices while driving.