Home, Commercial Rate Hikes Not Enough to Offset Construction Costs

To counteract rising construction material costs that have increased about 26.7% the first four months of 2022, personal and commercial property insurers will continue to gradually increase rates, said Moody’s Investor Service.

The rating agency said insurers have been “raising coverage levels and rates, but generally not sufficiently to cover higher construction costs.” These costs are credit negative for homeowners and commercial property insurers, said Moody’s, adding that construction wages have increased about 5.5% and supply chain disruptions and labor shortages are causing project delays.

The price of lumber has risen 17% during the first four months, and oil prices are higher — driving up the costs of products like paint, roofing shingles, and flooring.

“We believe that coronavirus shutdowns in China could lead to shortages for such construction materials as cabinets, lighting fixtures, plumbing and electrical inputs, hardware, tools, and some flooring products,” Moody’s added.

According to its annual survey of rated P/C insurers, homeowners insurers expect to increase rates about 7% in 2022. The yearly average since 2015 is between 3% and 5% — the average yearly inflation rate. Moody’s said it expects the combined ratio in homeowners to increase by 2.5 points or more.

Commercial property insurers expect to raise rates about 6.5% in 2022.

Moody’s explained these rate increases are not enough to offset the increases in construction costs. Insurers’ coverage software may not be adequately accounting for increases, or insurers have a long-term practice of increasing coverages only by the average yearly inflation rate. Also, large increases could affect retention rates.

Furthermore, regulators push back on rate increases, particularly for homeowners insurance in prior-approval states.