Lower-income households bear brunt of insurance hikes

Whilst inflation is declining, insurance prices have risen sharply.

Disinflation is slowing insurance rate increases, with projections showing a reduced gap between personal premium growth and income growth in the coming years, according to Swiss Re Institute. 

Recent high premium growth was driven by rising costs in the construction and auto sectors, along with significant underwriting losses due to natural catastrophes. Climate risks remain a challenge, emphasising the need for investments in adaptation and mitigation to maintain insurance affordability.

Whilst inflation is declining toward central banks’ 2% target, prices of goods, including insurance, have risen sharply. 

In many major markets, personal insurance premiums have grown faster than disposable incomes. Between 2020 to 2023, average personal property and motor insurance premiums in the US, UK, and Australia grew 11 percentage points higher than disposable income growth. 

In Germany, property premiums outpaced income gains by 14 percentage points, though motor premiums showed more moderate increases.

As inflation eases, claims inflation is expected to drop, stabilising insurance rates. Investment in climate risk adaptation could help reduce underwriting losses, cutting the cost of providing insurance. 

Premium rates have increased due to inflationary pressures in the construction and auto sectors, as well as severe natural disasters over the past three years.

In the US, home insurance combined ratios averaged 105% from 2021-2023 due to major hurricanes. Personal auto combined ratios reached 112% in 2022, the highest since 2000. 

In the UK, motor liability combined ratios rose above 110% in 2023 from 92.4% in 2021. 

Similarly, Germany’s motor gross combined ratio rose to 110% in 2023 from 101% in 2022. Insurers have responded to these losses by raising premium rates, with some climate risks becoming too costly to insure in specific regions.

Insurance spending in major markets now accounts for about 2% of household disposable income, though it disproportionately affects lower-income households and those in high-risk areas. In Florida, home insurance premiums surged 68% between May 2021 and May 2023, compared to the national average increase of 35%.

Global supply chain recovery has eased inflationary pressures on home replacement costs and vehicle prices. 

Construction producer price inflation is expected to return to pre-pandemic levels by 2025-2026, whilst motor inflation has turned negative in the US and UK. These trends suggest premium rate increases will stabilise in the near future.

For sustainable insurance markets, premium rates must align with risks, requiring robust risk assessments and underwriting discipline. With climate-related losses a constant threat, measures such as enforcing building codes and flood protection are necessary to reduce losses and maintain affordable insurance premiums.