Insurance in the Age of Compound Volatility: How Short-term and Longer-term Challenges are Reshaping Insurance

The summer months are a time of year often associated with getting in the car and driving off for a day at the beach or perhaps an extended family road trip. And while many people will continue to spend a lot of time this summer in their car, the rising cost of auto insurance has an increasing number of consumers seeking to switch insurers. As we enter the second half of 2024, the insurance sector finds itself operating in an era of compound volatility, the combination of near-term risks, such as geopolitical and technology disruption, and longer-term structural changes to the U.S economy, including the energy transition and sticky inflation. The risk factors, both near and long term, are having a significant impact on the sector, raising questions on whether the costs increase seen in the past year, notably in auto and home insurance, are more structural than cyclical? Looking ahead to the Fall season and beyond, here are 3 questions of note:

Will auto insurance costs decline?

According to the most recent Consumer Price Index data, auto insurance premiums have surged 19.5% year over year. This increase has been driven by several factors, including higher vehicle repair costs due to supply chain shortages, advanced vehicle technologies, risky driving behaviors, and rising litigation costs. Consequently, consumers are increasingly shopping around and seeking to switch their insurance providers. Our inaugural KPMG American Perspectives Survey, revealed that individuals earning between $50,000 and $200,000 annually are the most likely to switch their auto insurance, with nearly a fifth of respondents having done so in the past two years. A central question is whether insurance costs will abate anytime soon? While repair costs may stabilize or decrease over time, potentially leading to lower auto insurance rates, this could be offset by liability trends. We expect in the near term a lot of variability in rates and a continuation of consumers shopping for coverage as we approach the end of the year.

 How will climate risk continue to impact costs?

 As catastrophic weather events become more intense, insurers are grappling with higher claims costs and reevaluating their risk exposure, leading to higher home insurance premiums. Increasingly we’re seeing more and more companies withdrawing from offering insurance all together in high-risk regions of the country as a result of extreme weather, creating an accessibility crisis for many Americans who are forced to seek last-resort insurance providers. As KPMG’s Economics team noted back in June, much of the rise in cost is structural as opposed to cyclical with many insurers still playing catch up on losses due to earlier weather disasters. Similar to auto coverage, our survey found that an increasing number of consumers have either shopped for or changed their home insurance coverage in the past two years. Notably, individuals with high incomes exceeding $200,000 were more likely to switch their home insurance providers. As climate risks continue to grow with regards to operations of an insurer, consumers are unlikely to see prices moderate through the back half of 2024 and beyond.

 How will technology continue to impact the sector?

 Like other sectors, insurance leaders are in the early stages of grasping the full potential of emerging technologies such as Generative AI. While much remains unknown, what is clear is they also recognize its immense potential in shaping future strategies. Last year in our KPMG Global CEO Outlook survey, we found that nearly three quarters of insurance leaders viewed GenAI as a top investment priority with one in five respondents believing the technology can enhance fraud detection and cyberattack response. As insurance organizations become more confident with Gen AI deployment, we expect them to explore value creation opportunities, enabling companies to remain competitive and attract new talent interested in working in a tech-driven sector.