Despite Increase in Cost of Materials and Labor, P&C Insurance Remains Affordable | Faegre Drinker Biddle & Reath LLP

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When the cost of materials and labor skyrocketed during the pandemic, some people may have speculated that the cost of paying out insurance claims would climb substantially as well, resulting in losses to the insurance industry. However, property and casualty insurance remains viable in the wake of COVID-19.

Why is that? While there has been an increase in the payout-per-claim cost, it pales in comparison to the drop in total claims. With respect to auto insurance, for example, much of the payout-per-claim cost can be attributed to the dip in manufacturing and production. As the supply of cars and car parts began to drop, their inherent value climbed. For the first time in recent history, a newly purchased used car might appreciate in value.

Despite low availability and the rising cost of materials, auto insurance companies maintained their viability. Much of the resilience of the auto insurance industry was a direct result of national stay-at-home orders: employees began working from home, festivals and concerts were cancelled, restaurants stopped providing onsite dining, students embarked on e-learning, and adults could have wine delivered right to their front door. Unsurprisingly, driving became less frequent. As a result, there were drastically fewer auto-related accidents and, thereby, even fewer auto-related claims. As claims declined, insurance companies were able to sustain themselves and even decrease premiums in some instances.

Similarly, in the world of repair and remodeling, there was growth despite rising material costs. One Houston-area contractor observed that he has seen the price of lumber alone spike by 35% during the pandemic. A Florida-area P&C Insurance Director provided some additional perspective, stating that in addition to the rise in cost of materials, there has been an equally drastic increase in the cost of labor. And, since the continental U.S. saw a substantial rise in catastrophic natural disasters, speculation suggests that the total number of claims would rise as well.

Nonetheless, the P&C industry remained steady. Throughout the pandemic there were many state and local orders preventing gatherings of more than a few people. Many were apprehensive about letting unfamiliar people into their homes and even avoided gathering with their own families for the holidays. Because much of the work in the field of repair and remodeling requires the contractor to do the work inside of the customer’s home, many non-emergent interior jobs were put on the backburner.

Initially, most insurers anticipated losses and, in order to continue to provide sustainable insurance products for their insureds, responded by increasing premiums for 2021. However, since these anticipated losses never materialized, insurance companies have started decreasing premiums as the market dictates. The market trend for 2022 indicates that a decline in premium rates is likely should the drop in overall claims continue.

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