How Inflation Affects P&C Rates & How It Doesn’t

Triple-I fields a lot of questions from consumers and the media as to exactly how inflation affects insurance premium rates. As we explain in a new Issues Brief, the relationship between inflation and rates is, in one sense, straightforward -- and yet the outcomes are not necessarily what you might expect.

As material and labor costs rise, the cost to repair and replace damaged homes and vehicles increases.

If premium rates didn’t reflect these increased costs, insurers would quickly exhaust the funds they set aside -- ‘policyholder surplus’ -- to ensure that they can afford to keep their promises to pay all claims. If losses and expenses exceed revenues by too much for too long, they risk insolvency.

But insurers do more than pay claims: They employ people (labor costs) and conduct business operations (supplies and energy costs); and, if they are to remain in business, they have to earn a reasonable profit.