Inflation explained: As material, labor costs rise, so do insurance premiums

Editor's note: This is the fourth story in an occasional series on the causes and impact of inflation.

There is a dominant driver when it comes to setting car and home insurance rates: the cost of the items insurance companies cover when they pay out claims.

And the cost of all those items has risen, industry experts said.

Robert Passmore, vice president of auto and claims policy at the American Property Casualty Insurance Association in Chicago, compared it to a wave hitting the shore.

"You have changes occurring in the economy, and, at the same time, claims are being made and paid," Passmore said. "And those insurers have to then set their policy rates for the next insurance cycle, so there's kind of a delayed effect always happening."

Those economic changes over the past five years have included price hikes in areas like raw building materials, auto parts and the cost of medical care.

"When those things go up, that has a direct effect on the cost of home and auto insurance," Passmore said.

Homeowners insurance

Passmore said it simply costs more to perform home repairs today than it did five years ago.

"The cost of overall construction has gone up about 40%," he said. "The cost for things like shingles and lumber, commonly used in home repair, is up 37%. So if you have a house fire, the cost to replace almost anything that's been damaged has gone up. And you might need to rent a place while your home is being rebuilt — that cost has gone up about 20% in the past five years."

Richard Cassidy is the president of Kattan Ferretti Insurance in Greensburg. He's been in the industry for more than three decades and said the most recent period of inflation is the worst he's seen.

"There are multiple reasons," Cassidy said. "If there's a fire or a wind storm, you have to hire a contractor to fix your home. The Insurance Information Institute said that between 2020-2022, material costs have gone up 55%. I don't have hard data for the past two years, but anecdotally, I can say those prices have not come down in 2023 and 2024."

Cassidy also pointed to thousands of homes in the U.S. that have been built in areas where flooding and wildfire are regular hazards.

"You see on the news all of the flooding, fires, tornadoes," he said. "In Pennsylvania, ours is a lot more wind and hail damage, frozen pipes bursting in the winter, but all of that is covered under insurance claims, and the severity of those claims has increased due to inflation."

In late 2023, ABC News reported that in some areas of California prone to regular wildfires, home insurers were refusing to provide coverage, or only offered it with impossibly high premiums.

"Forty or 50 years ago, we didn't have thousands of homes in these areas. Now you do," he said. "That itself isn't a big deal here in Pennsylvania, but it all adds to the inflation we see in insurance."

Car insurance

The same types of price hikes have hit the automotive industry, both Cassidy and Passmore said, with increases for parts as well as labor.

But one relatively new feature contributing mightily to the increased costs of insurance claims is the influx of technology in modern vehicles.

"The 'computerization' of cars has added to the complexity of not just operating the car, but also fixing it," Cassidy said. "Twenty years ago, you might hit a deer and need to have your bumper and perhaps your radiator replaced. Today, there's all sorts of other technology that gets damaged in a crash like that."

Features like backup cameras and automatic emergency braking help drivers avoid crashes, Passmore said.

"But when you do get in a crash, all of that makes it more expensive to repair," he said. "The windshield used to just be a piece of glass, adhesive and a rubber gasket. You could have it replaced in your own driveway. Today, you have cameras mounted on the windshield, and you have sensors there that the car depends on to function correctly. Anytime your vehicle is damaged, the shop has to now assess the overall functioning of all the car's systems, so they know everything that's going to need fixed."

Cassidy said the average insurance claim on a deer strike used to be about $2,000. Today, he said, that figure is closer to $10,000.

"On top of that, cars are getting heavier and horsepower is increasing," he said. "The Highway Loss Data Institute (in Virginia) said that since 1985, the weight of the average car has increased by 33%. So when those cars get into accidents, the damage is more severe, and the cost to fix it goes up. It all adds to the cost of fixing it, and inflation has boosted the price of all those individual parts."

Finally, Passmore said, a lot of drivers picked up bad driving habits when roads were less crowded in the early days of the pandemic, particularly speeding.

"That's persisted in some cases as people got back out on the road, and when people are driving faster, that means harder crashes and more damage to repair," he said.

APCIA data from 2022 showed that for every dollar auto insurance companies brought in from premiums, they paid out $1.12 on claims.

"Companies have to catch up to the losses," Passmore said.

State regulation

Pennsylvania also has its own department fully dedicated to monitoring and regulating insurance.

Insurance companies must submit rate increase requests to the Pennsylvania Insurance Department for review and approval, spokesman Adrian Sipes said. Those requests must include a rate need analysis performed by the company's actuaries.

"PID employs its own actuarial staff to look for where insurance companies are making aggressive and inaccurate assumptions that would lead to excessive and unfairly discriminatory rates," Sipes said. "Often, PID is able to stop these hikes in their tracks."

Sipes said in 2024, the department's staff has blocked $131.8 million in rate-increase requests — $82.5 million in personal auto insurance and $38.9 million in homeowner insurance.

But he was also quick to join Passmore and Cassidy in noting inflation has affected the cost of materials across the board and echoed their thoughts on increased technology leading to more-expensive auto insurance claims.

For home insurance, Sipes said the replacement cost of a home can be viewed as the limit on a homeowner's insurance policy. As the price of raw and building materials increases, that replacement cost rises and is reflected in the premiums.

"In other words, even without the insurance companies filing to increase rates, a policyholder's homeowner's insurance premium will increase solely because of the higher replacement cost for their home," he said.

Sipes advised those with auto and home insurance to shop around for a policy that fits their needs and to talk to their insurance agent about optional coverages and which they truly need.

Consumers can also call the Pennsylvania Insurance Department with questions at 877-881-6388.