Inflation has slowed since it spiked in 2021 due to the COVID-19 pandemic. While it reached 7% in 2021 and 6.5% in 2022, it cooled to 3.4% in 2023 and is expected to continue on this stabilizing trend. Recent data suggests we will see a continuing dip in the Consumer Price Index (CPI) this year.

However, this doesn’t mean that inflation won’t have any impact on your insurance in 2024. Here are a few key ways in which experts expect the industry to be affected.

Auto Insurance and the Rising Cost of Repair

Rising costs of materials are predicted to particularly affect home insurance and auto insurance this year. Right now, car insurance prices are rising faster than the price of almost any other consumer good. Auto insurance prices rose by 19.2% in the past year, far exceeding the general inflation rate of 3.4%.

The chip shortage is one of the reasons why auto insurance prices have soared, in addition to labor shortages. These shortages have increased the cost to repair cars, which experienced a 12% increase in 2022. However, in 2023, auto body repair costs only increased by 3.3%, which aligns with the general inflation rate.

There are other signs of hope, too. Used car prices are decreasing, and new car prices are stabilizing. The overall “cooling” of inflation is reducing the costs of legal services, medical care, and labor, which all help dampen the inflation of auto insurance prices.

Insurance-to-Value in Homeowner’s Insurance

As the costs of property, building materials, and labor continue to increase, many home insurance policyholders may see changes in their insurance-to-value.

Insurance-to-value describes the comparison between the amount for which your home is insured and the cost to repair your home. With inflation, the cost to repair your home may increase, and so policyholders may see their home insured for less than the actual cost of the replacement.

Some experts suggest that while inflation rates are easing and most insurance prices are only increasing at moderate levels, property insurance is one outlier. It’s likely you’ll see a premium increase of 10% to 15%, according to some estimates. Still, since inflation is slowing, the increase is not likely to be quite as drastic as it was during the previous few years.

Merger Acquisition Activity

Since the second quarter of 2022, merger & acquisition (M&A) activity has been on the decline in the insurance industry, largely due to macroeconomic factors like inflation. As inflation cools in 2024, experts suggest that we may see an increased amount of deals.

Other Effects

Here are a few other effects that inflation is having and may continue to have on insurance in 2024:

Rate adequacy

Despite how inflation appears to be stabilizing, there is still some unpredictability. This means that determining rate adequacy may become difficult for insurers.

Insurance reserves

Sudden, unpredictable increases in the costs of goods may affect insurance reserves. It may cause the need for reserve strengthening, which could increase prices.

Labor crunch

Due to low unemployment rates, the cost of labor is increasing. Not only does this create a lack of skilled labor, but also a lack of productivity and increased prices.

Profitability

One positive effect for insurers is expected increased profitability this year. Cooling inflation will lower claims severity in many areas. However, rising social inflation—how insurers’ claim costs increase at a higher rate than general inflation—may dampen this.

In general, insurers have learned that simply reacting and responding to risks isn’t enough—they need to change the way they operate to prepare for sudden changes and prevent losses. This is why investing in new technologies, adapting to the changing climate, and increasing the customization and personalization of policies are important trends—learn more about what’s to come in 2024.