Relief in sight for insurance costs as disinflation progresses

Today, broad price disinflation is underway, and we expect insurance rate increases to slow in the coming years. This will help close the gap between personal premium growth and personal income growth. The drivers of higher premium growth were high price rises in the construction and auto sectors, and large underwriting losses partly due to natural catastrophes. Ever-present climate risks mean it is critical to invest in adaptation and mitigation measures to aid future insurance affordability.

The rate of increases in prices is slowing as inflation is declining back to central banks' typical 2% target. Yet the legacy of the post-pandemic inflation surge is that the price level of many goods and services, including insurance, is now much higher. A consequence has been that in many of the major markets we track, personal line premiums have grown faster than disposable incomes. For example, average personal property and motor insurance premium growth in the US, the UK and Australia outpaced disposable income growth by 11 percentage points (ppts) in 2020-23. In Germany, property premium growth exceeded income gains by 14 ppt, though motor premiums have grown more moderately.¹

That said, as general inflation now comes down, we expect claims inflation to fall too, which should help insurance rates to stabilise. In the long term, property insurance would become more sustainable with greater investment in climate risk adaptation and mitigation. This could help to prevent big losses from occurring in the first place, and so reduce the cost of providing insurance.

Figure 1. Motor vehicle insurance inflation vs motor price inflation 

The cost of insurance has risen with a lag to prices in other sectors (see Figure 1), due to a re-pricing of premium rates following significant underwriting losses. The latter resulted from a transfer of inflation pressures, notably in the construction and auto sectors, into claim costs as well as severe loss-inducing natural catastrophe events in the last three years.

Property-casualty insurers have experienced significant underwriting losses in recent years. In the US, amid several major hurricanes the combined ratio of the home insurance segment averaged 105% from 2021 to 2023. Meanwhile, the combined ratio in personal auto climbed for two years running to 112% in 2022, the highest since 2000.² In the UK, the combined ratio for motor liability rose to above 110% in 2023 from 92.4% in 2021.³ In Germany, the gross combined ratio for motor rose to 110% in 2023 from 101% in 2022.⁴ In response to large losses, insurers have raised premium rates (and some have indicated that specific climate risks in certain areas have become too costly to insure).⁵

Figure 2. Personal non-life insurance premium growth vs. disposable income growth, 2020 - 2023

On average, we estimate that spending on insurance in major markets makes up around 2% of household disposable income, and our analysis shows that this share has increased marginally in the past year. However, lower income households and communities living in areas more exposed to climate risks are likely to be disproportionately affected. Florida, for example, is highly exposed to severe storm risks, and home insurance premium rates rose by 68% from May 2021 to May 2023, compared with a national average increase of 35%.⁶ Also in the US, there have been signs that higher rates have led to increased shopping around for lower-priced policies,⁷ with some consumers indicating they may cancel their home or auto insurance (20% for auto; 16% for homeowners).⁸

Global supply chains have recovered from pandemic-inspired disruptions, which has seen inflation in home replacement costs and vehicle prices fall. We expect construction PPI inflation in major markets to return to pre-pandemic averages by 2025-26.⁹ Further, motor CPI inflation has declined significantly, even turning negative (i.e. deflation) in the US and the UK. This should help stabilise premium rate increases in the near term. All told, insurance market functioning requires that premium rates are commensurate with exposure, which requires robust forward-looking risk assessment and underwriting discipline. And, with climate-related losses a perennial threat,¹⁰ mitigation and adaptation actions, for example, enforcing building codes and building flood protection barriers are critical, to prevent large losses from occurring in the first place.¹¹ These measures will sustainably reduce the costs of providing insurance, helping to keep premiums affordable and accessible.