Rates doomed to fall behind the curve under weight of unprecedented 2022 price hikes
Select P&C replacement costs will suffer double-digit inflation through 2022 and at least high single-digit inflation through 2023, while lingering wildcards in labour costs leave some doubts over the pace and scope of any disinflationary respite for insurers, a leading industry analyst told Intelligent Insurer.
Insurance rates are falling behind the steepness of the inflation curve. “We are not passing the full replacement cost increases to consumers,” Michel Leonard (pictured), chief economist of the Insurance Information Institute (III), said on behalf of the industry.
He cites a retail auto rate hike forecast of 8 percent for 2022, a figure Leonard said “resonates very well” with how III members see outlook, but represents only about half the increase in replacement or repair costs being suffered.
“We’re used to operating in challenging environments,” Leonard told Intelligent Insurer. “It won’t be debilitating.”
Retail lines will see the worst of it. Personal auto repair/replacement cost inflation has already broken above 20 percent early in 2022, but can yet tame to 11 percent for the full-year reading and to a 7.7 percent pace in 2023, III’s latest forecasts show. Homeowners’ replacement cost inflation will likely ease only to a still-hot 7.5 percent in 2023 from the 11.5 percent currently forecast for FY2022.
That overall disinflation for claims costs seems guaranteed, Leonard argues. It’s the precise path to those tamer cost trends that can still waver.
“I’m very confident on the direction,” Leonard said, citing macro top-down trends plus the more predictable elements in the current inflation picture like the easing of supply-chain bottlenecks, the stabilisation of post-COVID-19 pandemic demand and normalisation of production capacity.
But it’s not just those predictable elements. The underlying structure of inflation “is very different” from prior inflationary bouts. Compared to the classic 1970s oil shock, for example, the drivers are more myriad, but the affected areas surprisingly more confined. While auto and property suffer the worst of the price spikes, long-tail liability claims costs look entirely unaffected to date.
“We are not going back to labour being as widely available.” Michel Leonard, Insurance Information Institute
A multi-layered problem
It’s a multi-tiered problem that begins from the measurable and predictable issues with materials. Crucially, it also includes labour, where some troubling unknowns could not only elevate wages but also result in longer repair and replacement times which might never reset to the old normal. All with caveats for politics, geopolitics and policy.
“My professional opinion: labour is the mess,” Leonard said. Not everyone in construction and auto repair will be in a rush to return to the same old grind, he said of the post-pandemic sentiment towards what workers have since discovered can be “a debilitating environment”.
“We are not going back to labour being as widely available,” Leonard said. The catch? “It may not be about the premium, but about the pace.” Repair times won’t return to the old standard, saddling insurers with increased temporary housing or auto costs for insureds and adding costs to the claims adjustment process.
“Right now, we just say there will be a margin; we don’t try to quantify it while we wait to confirm that behaviour,” Leonard said. One or two years might be required to test the new normal.
That pain will be tilted towards consumer lines as housing contractors are less structured and unionised than commercial builders, thus subject to greater labour and work interruption, Leonard suggested. Retail auto repair may suffer similar lags vis-à-vis how commercial auto claims are handled.
Materials prices—among the most volatile to date—at least provide the comfort of being traceable. Container movement tracks supply chain problems and the data shows conditions “getting better”. Production capacity defines scarcity and is proving to be a relatively confined problem. Frequently, as in the case of auto parts, a closer look reveals that problems widely thought to be multi-faceted are actually confined to supply chain bottlenecks.
The degree of visibility of the inflation drivers may also define the order at which they will abate, Leonard suggested.
Automotive replacement and repair costs will be the first to head back to the historical trend, following the easing of the supply chain issues that have driven their pricing, and toss in an unknown add-on for new-normal labour costs and repair times. Free of supply chain problems, auto parts prices had grown below the headline inflation rate for a decade.
Commercial construction should follow second in line, again with a to-be-determined margin for added labour costs and longer construction times. Comparative strength in managing labour market troubles gives the segment greater comfort than homebuilders have.
Forecast doubts, if any, are less focused on the overall disinflationary outlook or the rough order of likely improvement.
Timing, and the array of possible delaying factors, remain the wildcards.
“In terms of components and timeline, I am more confident of the targets within even 85 to 90 percent confidence,” Leonard said of the sum of forecast inputs. “But for the timeline, as we look at three-year forecasts, I would probably add in a ‘plus or minus one year’.”
Insurance Information Institute, P&C, Claims, Disinflation, Rates, Prices, Costs, Michel Leonard, Global, Insurance, Reinsurance