Property insurance remains affordable despite increased material and labor costs | Faegre Drinker Biddle & Reath LLP

As material and labor costs skyrocketed during the pandemic, some people may have speculated that the cost of paying out insurance claims would also increase significantly, resulting in losses for the insurance industry. However, property and casualty insurance remains viable in the wake of COVID-19.

Why is that? The payout cost per claim has increased, but pales in comparison to the decrease in the total number of claims. In terms of auto insurance, for example, much of the cost per claim can be attributed to the decline in manufacturing and production. As the supply of cars and car parts began to decline, their intrinsic value rose. For the first time in recent history, a newly purchased used car could appreciate in value.

Despite low availability and rising material costs, auto insurance companies maintained their viability. Much of the auto insurance industry’s resilience was a direct result of national stay-at-home orders: employees began working from home, festivals and concerts were cancelled, restaurants stopped eating on-site, students began e-learning and adults could do this have wine delivered to your doorstep. Unsurprisingly, driving has become less common. As a result, there have been drastically fewer car accidents and therefore even less car damage. As claims fell, insurance companies were able to hold their ground and in some cases even lower premiums.

In the world of repair and remodeling, too, there has been growth despite rising material costs. A Houston-area contractor noted that he had seen the price of lumber increase by 35% during the pandemic. A Florida-area P&C insurance director provided some additional perspective, explaining that along with the increase in material costs, there has been an equally dramatic increase in labor costs. And with the continental US experiencing a significant increase in catastrophic natural disasters, speculation suggests the total number of claims would also increase.

Nevertheless, the P&C industry remained stable. During the pandemic, there have been many state and local orders preventing gatherings of more than a few people. Many were afraid to let unfamiliar people into their homes and even avoided gathering with their own families on the holidays. Because much of the repair and remodeling work requires the contractor to carry out the work at the customer’s home, much of the interior work that was not forthcoming has been deferred.

Initially, most insurers anticipated losses and responded by increasing premiums for 2021 in order to continue offering sustainable insurance products to their policyholders. However, since these expected losses never materialized, insurance companies have started to lower premiums as the market dictates. Market developments for 2022 suggest that if overall claims continue to fall, premium rates are likely to fall.

Leave a Comment