How Inflation is Plaguing Property and Casualty Claims
Property and casualty insurance (P&C insurance) protects individuals and enterprises from financial losses due to damage or injuries like car accidents, natural disasters, lawsuits from third-party injuries on your property, and more.
Lately, there has been a rise in the number and cost of claims. With frequent wildfires, tornadoes, hurricanes, and floods and inflation raising the cost of medical care, premium cost for P&C insurance is also escalating.
The Inflationary Squeeze
Inflation is a double-edged sword for P&C insurers. On one hand, the coverage is a necessity in, what seems like lately, a disaster-filled world and it’s nearly impossible to raise premiums fast enough to keep pace with rising claim costs. Unfortunately, inflation also increases the cost of living indiscriminately, from medical care to repair costs, making even minor incidents require significant amounts in insurance claims.
Repair and Replacement Costs
The cost of building materials, labor, and car parts has been steadily increasing since the pandemic. According to the Bureau of Labor Statistics, construction materials rose by 25% by 2021, while the cost of components like plywood increased by over 125%.
The Bureau of Labor Statistics December 2023 data shows civilian compensation costs rose by 0.9%. The car parts price index increased from 0.6% in 2020 to 5.4% in 2021, with a continued projected upward trajectory. Supply chain disruptions are a key contributing factor in industry price changes.
Medical Expenses
Inflation in healthcare costs does directly impact medical malpractice and personal injury claims. A portion of the awarded damages covers the plaintiff's future medical expenses in a healthcare malpractice or personal injury lawsuit. As healthcare costs increase, future treatment costs rise, translating to higher overall damage awards for plaintiffs. Additionally, the expert testimony fee from medical professional increases, raising litigation costs.
The cost of treating patients is also high due to inflation, growing compensation and medicine costs, and healthcare worker shortages. Health Research Insights (HSI) shows a 7% projected increase in treatment costs in 2024, up from 6% in 2023 and 5.5% in 2022.
Profitability Under Pressure
The combined ratio is a P&C insurance tool that measures profitability. Its calculation comes from adding the loss ratio (incurred losses divided by earned premiums) and the expense ratio (operating expenses divided by earned premiums). A combined ratio below 100% indicates profitability, while a ratio above 100% signifies loss.
As the cost of repairs, medical care, and settlements associated with claims increases, the loss ratio also escalates, pushing the combined ratio closer to or above 100%. As the cost of repairs, medical care, and settlements associated with claims escalates, the loss ratio also increases.
Declining profitability has a significant impact on the P&C insurance industry. It can push insurance providers to hike premiums to offset rising claim costs to maintain solvency, straining consumer budgets. Insurers may also introduce policy restrictions or deductions to limit payouts burdening policyholders and potential industry consolidation. In extreme cases, declining profitability increases mergers and acquisitions of small insurance companies, decreasing consumer choices.
Avoid the Inflationary Impact on P&C Claims with Smart Options
Inflation has put a lot of pressure on P&C insurers, pushing them to increase premiums, restrict policies, or consider closing shop. With the future still uncertain, P&C insurers are adapting through innovation and collaboration to bypass this inflationary inferno.
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