Understanding the Rising Costs in Home and Auto Insurance: Insights from Equifax and JD Power

Home and auto insurance premiums are on the rise. Insurance companies sought to raise homeowners’ premiums by more than 11 percent last year, according to S&P Global Market Intelligence. And average auto insurance premiums are climbing even faster.

In the latest episode of the Market Pulse podcast, Bob Homer, General Manager and VP of Insurance and Alliances at Equifax, and Stephen Crewdson, Senior Director of Global Business Intelligence at JD Power, offered a deep dive into the challenges and trends shaping the insurance industry right now. They discussed the sharp rise in home and auto insurance premiums, the impact of economic and social inflation, and how both consumers and insurers are navigating these turbulent times.

The Surge in Insurance Premiums

Home and auto insurance premiums have surged post-pandemic. According to a Q1 2024 Bankrate report, average premiums for full coverage auto insurance hit $2,543 this year, a 26% increase from last year,” said Bob.

Stephen explained the multifaceted reasons behind this surge. “If you think about specifically what’s affected auto insurance premiums, if we think about the jump that happened in the price of used vehicles... that led to an increase in cost pressure on used vehicles and used car prices skyrocketed in 2021 into 2022. That was affecting insurers in the sense that when a vehicle is in a collision and is deemed a total loss, the insurer has to reimburse the customer, the insured, for the actual cash value of that vehicle on the day that it was a loss.”

Economic and Social Inflation

The discussion then turned to the concept of economic and social inflation. Economic inflation, driven by factors such as increased labor and parts costs, has been a significant contributor to rising insurance premiums. “Supply chain constraints led to longer waits to get parts. Labor constraints led to longer waits to get your vehicle back when it was being repaired, and that led insurers to pay longer for a rental vehicle,” Stephen noted.

Social inflation, on the other hand, refers to the increasing frequency and severity of litigation against insurers. Stephen elaborated, “Many more claims now are being litigated. And generally speaking, one of two things will happen when a claim gets to court. Either that claim will be settled or that claim will go all the way through the trial and reach a judgment. And what's affected insurance prices as of late is that, again, more claims are going to court and those judgments and those settlements are growing in size substantially.”

Consumer Behavior and Impact

With rising premiums, consumers are naturally feeling the pinch and are responding in various ways. “We've seen a lot more shopping and switching in general over the last two years,” said Bob.

Stephen added, “we saw a record amount of shopping happening in early 2023, and now we're about a year and a half into this hard market, this rate-taking cycle. Consumers were out shopping, but they were finding it more difficult to get a lower premium because by that point, almost all insurers had been increasing their premiums now for some time.”

This has also led to an increase in uninsured drivers. “Some households, while they're shopping and not able to find a lower premium, are making that tough decision whether they pay rent or they pay the auto insurance, whether they pay the car note or they pay the insurance. And unfortunately, what that's leading to is in some cases they're deciding that they cannot or will not be able to pay their auto insurance. So, we're seeing an increase in uninsured driving,” Stephen remarked.

Insurer Responses to Affordability Challenges

Insurers are not sitting idle in the face of these challenges. They are implementing various strategies to manage affordability issues and retain customers. 

“We've seen some unprecedented staffing reductions across the industry” and that “insurers don't need to spend as much to draw people out to market. People are out to market on their own now,” Stephen said.

Proactive communication has also become key. Bob mentioned that “there are steps that an insurer can go through in terms of proactive communication with the consumer about rate increases, having discussions around how to mitigate some of that increase.” 

Stephen reinforced this, stating, “the consumer who has those types of conversations with their insurer can end up being just as satisfied when they have a rate increase as the consumer who does not have a rate increase.”

The Rise of Usage-Based Insurance

A significant trend is the increasing popularity of usage-based insurance (UBI). Stephen noted that “more consumers than ever before signed up for UBI for usage-based insurance policy.” 

He explained that UBI can provide substantial savings for safe drivers and also helps consumers understand and improve their driving habits. 

“If you're on and insurer’s UBI program, they're going to share the data they're collecting back with you in a way that they're also going to educate you on. These are ways you can improve your driving,” Stephen explained.

Building Trust and Transparency

Both Bob and Stephen emphasized the importance of building and maintaining trust between insurers and policyholders. Bob stated, “the reason I might be pursuing litigation or taking my claim against the carrier to the next step is because of the lack of trust right there. It's the way that you feel that you get representation to ensure you're being treated fairly.” 

Transparency and clear communication are critical in fostering this trust. Stephen highlighted the role of digital channels in improving transparency, suggesting that insurers can “provide layers of information – both high level or they can click in for more detailed information.”

Looking Ahead

As the industry moves forward, both consumers and insurers must adapt to the changing landscape. Stephen advised consumers to reach out to their insurer. 

“They have a lot of people at the company who can walk you through that language, visit the digital channels of your insurer,” he said.

For insurers, Stephen emphasized the need to continue refining their approaches to customer communication and policy customization.

For more check out our Market Pulse podcast page. 
 

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