Insurance companies are not raising coverage levels and prices enough to compensate for rising construction costs in the midst of higher inflation, Moody’s Investors Service Inc. said in a report on Wednesday.
Building materials costs have increased by 26.7% and labor costs by 5.5% during the first four months of 2022 compared to the previous year, which drives up repair and rebuilding costs, says Moody’s in the report.
Commercial real estate insurance companies are expected to increase prices by about 6.5% in 2022, a decrease from an interest rate increase of 9% in 2021 and an increase of 13.5% in 2020, Moody’s said.
Several reasons may explain why insurance companies do not raise prices and limits sufficiently, according to the report.
Design inflation software and other insurance tools may not take sufficient account of increased construction costs, Moody̵7;s said.
Insurance companies may also have a long-standing practice of increasing coverage at an average annual inflation rate, such as 3-5% to even out construction cost volatility.
They may also be worried that large, sudden increases in coverage could cause policyholders to shop around, according to the report.
As a result, coverage levels are likely to rise for several years rather than at once to mitigate the impact on customers, Moody’s said.
Higher costs for building materials and labor have increased the loss for commercial property insurance companies, says Moody’s.
The overall conditions for past disasters will continue to increase in 2022, as loss cost trends are likely to exceed insurance rate hikes, Moody’s said. Disaster losses also remain a key risk even if the industry is well-capitalized to withstand potential insurance losses, it says.