As inflation continues to decline, insurance prices are on the rise, disproportionately impacting lower-income households, according to a report from the Swiss Re Institute.
While disinflation has tempered the pace of insurance rate increases, projections indicate that the disparity between personal premium growth and income growth will narrow in the coming years. Recent spikes in premium growth have been attributed to escalating costs in the construction and automotive sectors, coupled with substantial underwriting losses stemming from natural disasters. The ongoing climate crisis poses significant challenges, underscoring the urgent need for investments in adaptation and mitigation strategies to enhance the affordability of insurance.
Despite the overall decline in inflation towards central banks’ target of 2%, prices for essential goods—including insurance—have surged. In several major markets, personal insurance premiums have outstripped the growth of disposable incomes. Between 2020 and 2023, average personal property and motor insurance premiums in the United States, United Kingdom, and Australia increased by an average of 11 percentage points more than disposable income growth. In Germany, property premiums exceeded income gains by 14 percentage points, although motor premiums showed more modest increases.
As inflation cools, a reduction in claims inflation is anticipated, which could stabilize insurance rates. Investments aimed at adapting to climate risks may also mitigate underwriting losses, thereby reducing the overall cost of providing insurance.
The recent uptick in premium rates has been fueled by inflationary pressures in both the construction and automotive sectors, along with severe natural disasters experienced over the past three years. For instance, in the United States, average combined ratios for home insurance reached 105% from 2021 to 2023, primarily due to major hurricanes. The personal auto combined ratios soared to 112% in 2022, marking the highest level since 2000.
In the UK, motor liability combined ratios climbed to above 110% in 2023, up from 92.4% in 2021. Similarly, in Germany, the motor gross combined ratio increased to 110% in 2023 from 101% in 2022. In response to these losses, insurers have raised premium rates, with some climate-related risks becoming prohibitively expensive to insure in certain regions.
Currently, insurance spending in major markets constitutes approximately 2% of household disposable income, placing a heavier burden on lower-income households and those residing in high-risk areas. Notably, in Florida, home insurance premiums skyrocketed by 68% from May 2021 to May 2023, significantly higher than the national average increase of 35%.
The recovery of global supply chains has helped alleviate some inflationary pressures associated with home replacement costs and vehicle prices. Construction producer price inflation is projected to revert to pre-pandemic levels by 2025-2026, while motor inflation has turned negative in both the US and UK. These trends suggest that increases in premium rates may stabilize in the near future.
For sustainable insurance markets, it is crucial that premium rates align with the associated risks. This necessitates rigorous risk assessments and disciplined underwriting practices. Given the persistent threat of climate-related losses, implementing measures such as enforcing building codes and enhancing flood protection will be essential in reducing losses and ensuring the affordability of insurance premiums.
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