Hard Market Economic Pressures
Surging inflation has been a persistent concern in the insurance space over the last few years, resulting in eroding investment income and higher administrative costs among carriers, greater underwriting uncertainty, increased claim expenses and rising premiums. Such inflation reached a peak in 2022, evidenced by the highest consumer price index (CPI) in 40 years. According to the U.S. Bureau of Labor Statistics (BLS), the CPI for all urban consumers jumped by 9.1% year over year in June 2022 and remained near record-setting levels (7%-8%) for the next several months. Although the CPI has cooled throughout 2023, it’s still elevated; BLS data confirmed that it increased by 3% year over year in June 2023 before rising even further by 3.7% year over year in September 2023. As a whole, the increased CPI has driven up costs across several lines of commercial coverage, therefore inflating overall loss expenses within the property and casualty markets.
In the property insurance space, the costs to repair, replace or rebuild structures and their contents following losses have increased, prompted by rising labor and material expenses. In fact, BLS data revealed year-over-year increases in the CPI for a number of building- and construction-related elements in September 2023, including property furnishings and supplies (0.9%), tools and hardware (4.2%), and overall shelter costs (7.2%). In the auto insurance market, vehicle repair expenses and subsequent accident costs have also increased, brought on by supply chain disruptions for several critical vehicle parts (and vehicles overall). These concerns were reflected in a rising year-over-year CPI in September 2023 for new cars (2.5%) and motor vehicle maintenance and repairs (10.2%), according to BLS data. The workers’ compensation and liability insurance segments are also being affected by other forms of inflation, such as medical and wage inflation. Medical inflation refers to increasing prices for health care necessities; such inflation plays a major role in accident costs and related liability claims. BLS data confirmed that the CPI rose by 4.2%, 2.2% and 7.6% in September 2023 for medical care commodities, prescription drugs, and medical equipment and supplies, respectively. Considering these increases, medical inflation is likely to continue affecting expenses in the liability insurance space for the foreseeable future. Wage inflation, on the other hand, refers to workers’ rising salaries. Amid labor market challenges, some businesses have responded by boosting their workers’ pay, contributing to wage inflation.
To help curb overall inflation concerns, the Federal Reserve (Fed) steadily hiked up interest rates between 2022 and 2023. While financial experts initially feared that these increased rates would lead to a potential recession—a prolonged and pervasive reduction in economic activity—across the United States, those fears began to subside by the middle of 2023; however, financial pressures on businesses may persist. Specifically, if the Fed’s continued efforts to curb inflation trigger an economic downturn, it may decrease companies’ sales and profits, limit their credit capabilities and reduce their overall cash flow as customers take more time to pay for products and services. This means that businesses without substantial revenues, excess reserves and the additional capital necessary to offset extended periods of loss are more likely to make difficult financial decisions to avoid insolvency or bankruptcy. As such, it’s best for businesses to have adequate risk management measures in place. These measures may include establishing concrete financial plans to maintain profits, scaling back certain operations, promoting steady cash flow with shorter payment terms for customers, ensuring proper debt management, fostering strong connections with stakeholders and leveraging effective marketing strategies. Above all, it’s crucial for businesses to maintain sufficient insurance coverage in a down economy and secure financial protection against possible losses, as certain commercial exposures tend to rise during such a downturn.
Going forward, financial experts predict that overall inflation trends will likely hold steady, possibly remaining above 2% through 2025.
Consequently, carriers may continue to face inflation-related challenges as it pertains to maintaining coverage pricing to keep up with more volatile loss trends, thus impacting the total insurance expenses. Yet, it’s worth noting that the insurance industry as a whole is better positioned to incur losses to its reserves than it was in previous periods of prolonged inflation in U.S. history (i.e., the 1980s).
Supply Chain Disruptions & Hard Market Economic Pressures
Dating back to the beginning of the pandemic, the United States and much of the world have faced supply chain disruptions. Most of these issues stemmed from increased demand for various items and materials amid a slowdown in production and a subsequent lack of availability during pandemic-related closures. Even though businesses have since resumed their normal operations and increased production levels, demand for certain items and materials continues to outweigh inventory.
Any market swing is beyond your control; however, with the expertise and knowledge of your insurance advisor, you can manage the impact you face. Contact one of our trusted advisors today if you’d like help or guidance navigating the rapidly changing insurance market.