Analysts at Moody’s have warned that rising inflation and construction costs, in combination with catastrophe losses, are set to impact the combined ratios of insurers and reinsurers through 2022 and beyond.
In a new report, the rating agency examined the consequences of inflation and mounting losses for homeowners and commercial property insurers, which it says are causing elevated loss severity.
In response, insurers are beginning to raise coverage levels and rates, but Moody’s believes that, so far, these efforts have not been sufficient to cover higher construction costs.
US Government data shows that construction material costs have increased 26.7% and construction labour costs have increased 5.5% over the first four months of 2022 compared to the prior year period.
Rising construction costs are considered to be credit negative for homeowners and commercial property insurers because they drive up repair and rebuilding costs.
But, in order to temper the impact on customers, insurers are raising coverage levels and rates at a much slower rate, with a Moody’s survey showing that homeowners insurers expect to increase rates by about 7% in 2022, compared to the 3%-5% yearly rate increases recorded since 2015. Commercial property insurers expect to raise pricing by about 6.5% for 2022.
Analysts therefore see a deterioration in combined ratios as inevitable, with a base case scenario by Moody’s seeing a 2.5 percentage point increase as likely, but with other scenarios forecasting 5 to 7.5 points of deterioration.
Nevertheless, Moody’s assured that most insurers and reinsurers have ample capital to withstand potential underwriting losses in homeowners and commercial property lines stemming from inflation.
What’s more, throughout the first quarter of 2022 US homeowners and commercial property insurers reported strong results helped by low catastrophe losses.
