After spending the past couple of years raising rates to catch up with soaring claim costs, auto insurers may be facing another test.
The Consumer Price Index rose 4.2% in May from a year earlier, marking the highest inflation reading in three years.
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Although much of the increase was driven by energy prices, several categories that directly affect auto insurers remain elevated, including vehicle repair costs, maintenance expenses, and used car prices. Vehicle maintenance and repair costs rose 6.1% year over year in May, while used vehicle prices ticked higher after months of declines.
For Progressive (NYSE: PGR) and Allstate (NYSE: ALL), this is relevant.
Image source: Getty Images.
Battling inflation
Auto insurers don’t just sell policies. They assume the cost of repairing or replacing damaged vehicles. And when parts, labor, and used car prices rise, claims become more expensive.
That’s exactly what happened during the inflation surge of 2021 through 2023.
Repair shops faced labor shortages. Replacement parts became harder to obtain. Used vehicle prices soared. Insurers aggressively raised premiums to restore profitability. And for a while, those efforts worked.
Progressive reported a companywide combined ratio of 86.4% during the first quarter of 2026 and 90.2% in April. Any combined ratio below 100% indicates an insurer is generating an underwriting profit before investment income. Policies in force also increased 8% year over year to nearly 39.8 million at the end of April.
Allstate has also seen a dramatic turnaround. During the first quarter of 2026, the company reported an underlying auto insurance combined ratio of 89.5% and a recorded auto combined ratio of 81.9%. Auto policies in force increased 4.3% from the prior year as profitability improved after several years of significant rate increases.
Those numbers suggest both insurers successfully adjusted their pricing to reflect the new reality of higher claim costs.
The question now is whether they will need to do it again.
If repair costs continue to rise and used vehicle prices resume their upward climb, insurers could see claims costs accelerate faster than expected. That’s worth keeping an eye on, as a lot of companies have already begun slowing the pace of rate increases after restoring profitability.
Adapting to change
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The insurers that perform best during the next several years likely won’t be the ones adding the most policies. They will be the ones that respond fastest to changing claim trends.
Historically, Progressive has excelled in this area. Its telematics programs and pricing models let the company adjust rates quickly when loss trends change. That’s one reason Progressive has consistently gained market share while maintaining strong underwriting profitability. Policies in force increased 10% during 2025, including 14% growth in direct auto policies.
Allstate has become increasingly disciplined as well. After years of prioritizing profitability over growth, the company has largely completed its repricing efforts and is now rebuilding its policy count.
To be sure, inflation affects insurers differently from many other businesses.
Higher prices don’t automatically translate into higher revenue. Insurers must accurately predict future claim costs and adjust premiums accordingly. When inflation accelerates unexpectedly, underwriting margins can deteriorate quickly.
That’s why the most important metric to watch during the next year may not be policy growth; it probably will be the combined ratio.
After all, adding policies is relatively easy if an insurer is willing to lower prices or accept thinner margins. But that’s not a winning strategy when claim costs are rising.
The combined ratio measures how much an insurer spends on claims and operating expenses for every dollar of premium it collects. As I noted earlier, a ratio of less than 100% means the company is generating an underwriting profit. A ratio above 100% means it’s losing money on its insurance business before taking into account investment income.
That’s what makes the metric so important during inflationary periods.
If repair costs, replacement parts, labor expenses, and used vehicle prices continue to rise, insurers that fail to adjust pricing quickly enough will see their combined ratios deteriorate. Policy growth may look impressive on the surface, but it won’t matter much if each new policy is becoming less profitable.
The companies that tend to outperform during these periods are those willing to sacrifice some growth to protect underwriting margins. In other words, you should pay less attention to which company is writing the most new policies and more attention to the ones that accurately price risk.
That’s particularly relevant today because both Progressive and Allstate have spent the past two years restoring profitability after the inflation shock that followed the COVID-19 pandemic. If inflation begins accelerating again, the next phase of the cycle won’t be about rebuilding policy counts. It will be about proving that pricing remains ahead of claim costs.
And the fastest way to see who’s winning that battle is by watching the combined ratio.
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Jeff Siegel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Progressive. The Motley Fool has a disclosure policy.
Inflation Is Heating Up Again. Here’s What It Means for Auto Insurers Progressive and Allstate. was originally published by The Motley Fool
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