U.S. insurers are failing to raise premiums fast enough to keep up with historic rates of inflation, according to two American Property Casualty Insurance Association (APCIA) reports summarizing recent insurance inflation trends.

Rapid increases in inflation over the last year have spiked auto and homeowners insurance losses and combined ratios, the report said. Simultaneously, insurance claims inflation has been rising even faster than the underlying consumer price index, far outpacing increases in premiums.

The report found that incurred losses and loss adjustment expenses increased by 17.8% in the third quarter of last year compared to the third quarter of 2020 while direct written premium increased 3.1% for auto and 8.4% for homeowners.

Labor shortages and the escalating costs of construction materials, vehicle repair and rental cars are all contributing to higher insurance rates for consumers and could lead to longer wait times during the claims process.

In the auto insurance market, inflationary pressure is increasing the cost of repairs, car rentals and vehicle replacements. This is illustrated in the 20% increase in private passenger automobile bodily injury severity since 2019, as well as the fact that private passenger automobile loss ratios spiked from 55.6% year-end 2020 to 72.2% in the first three quarters of 2021, reaching the highest level compared to year-end loss ratios since 2010.

“Since the start of the pandemic, Americans have embraced riskier driving behavior, such as impaired driving, speeding, and failure to wear seatbelts," said Robert Passmore, vice president, auto and claims policy for APCIA.

“This concerning trend is leading to more crashes at a time when the cost of medical care and vehicle repairs are escalating," he added. “The safety of motorists and pedestrians is the primary concern for insurers. But drivers should be aware of these cost trends as well."

In the homeowners insurance market, U.S. home and commercial property lines are each expected to exceed 109% combined ratio in 2021. Rising construction costs, demand for new homes and CAT losses are driving this increase.

2021 was the seventh year in a row that the U.S. suffered at least 10 natural catastrophe events, each causing over a billion dollars in losses, according to the National Oceanic and Atmospheric Administration.

From 2020-2021, U.S. insurers paid out more than $176 billion in losses, the highest ever two-year total, according to Aon, which notes that U.S. incurred natural disaster losses in 2021 were more than double the 20-year average.

“Record catastrophe losses from 2020-2021 occurred amid a boom in home construction, intensifying demand for construction materials and labor," said Karen Collins, assistant vice president for APCIA. “From December 2019 through December 2021 the price of construction materials rose by 44.1%, with some lumber prices in mid-2021 up 400%."

“Insurers are strongly encouraging property owners to harden their homes and businesses to reduce potential loss and damage," Collins added. “In addition, during the current cycle of extreme inflation, policyholders are encouraged to make sure they have enough insurance and are financially prepared should disaster strike."

Will Jones is IA editor-in-chief.