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Insurers are not increasing coverage levels and rates sufficiently to offset rising construction costs amid higher inflation, Moody’s Investors Service Inc. said in a report Wednesday.
Construction material costs have increased by 26.7% and labor costs by 5.5% in the first four months of 2022 compared with the prior-year period, driving up repair and rebuilding costs, Moody’s said in the report.
Commercial property insurers are expected to increase pricing by about 6.5% in 2022, down from a 9% rate increase in 2021 and a 13.5% increase in 2020, Moody’s said.
Several reasons could explain why insurers are not adequately increasing rates and limits, according to the report.
Construction inflation software and other underwriting tools may not be adequately accounting for increased construction costs, Moody’s said.
Insurers may also have a long-term practice of increasing coverages by an average yearly inflation rate, such as 3-5% to smooth out construction cost volatility.
They may also be concerned that large, sudden increases in coverage could cause policyholders to shop around, according to the report.
As a result, coverage levels are likely to be increased over several years rather than all at once to temper the impact on customers, Moody’s said.
Higher costs for construction materials and labor have increased loss severity for commercial property insurers, Moody’s said.
Ex-catastrophe combined ratios will continue to increase in 2022, as loss cost trends will likely exceed insurance rate increases, Moody’s said. Catastrophe losses also remain a key risk though the industry is well-capitalized to withstand potential underwriting losses, it said.