According to the latest Insurance Economics Outlook from the Insurance Information Institute (Triple-I), property/casualty replacement costs in the US are currently rising more slowly than overall inflation and are expected to maintain this trend for the next two years.
Although the deceleration in cost increases may offer temporary relief for insurance carriers, it is unlikely to ease upward pressure on premiums, particularly with worsening underwriting trends and sustained replacement cost hikes over multiple years. However, this trend may provide some short-term respite before outpacing overall inflation again by 2026.
Regarding inflation, the Triple-I Outlook observes a 4.1% year-over-year decline in the Consumer Price Index (CPI). Despite this, the CPI has shown consecutive monthly increases since the start of 2024, rising from 3.1% in January to 3.2% in February and 3.5% in March.
However, this three-month trend does not conclusively indicate a reversal of the year-over-year decline for the current year. For instance, despite rising for three months out of 12 in 2023, the CPI still decreased from 8.0% in 2022 to 4.1% in 2023.
Currently, Triple-I projects US inflation to stabilise for the remainder of the year, hovering around 3.5%, with a margin of 0.4% above and below this projection.
Between 2019 and 2022, property replacement costs, encompassing materials and labour rates, surged by 55%, nearly quadrupling the CPI. It will require a decade of standard inflation, at 2% annually, to absorb the inflationary impact of pandemic-induced replacement cost escalations.
Year-to-date in 2024, P/C replacement costs have climbed by 1.5%, trailing behind the overall inflation rate of 3.5%.
Diminished replacement expenses for motor vehicles, particularly used cars, have moderated the replacement cost upsurge for both commercial and personal auto insurance, marking the lowest growth among P/C segments.
Michael Léonard, PhD, CBE, Chief Economist and Data Scientist, Triple-I, commented: “Triple-I forecasts P/C replacement costs to increase 3.2% by 2026, once again faster than overall inflation, ranging from 2.1% and 2.9% that year.”
Léonard pointed out that this trend is expected to reverse by 2026. “We expect P/C replacement costs to increase by 1.5% in 2024 and 2.5% in 2025, below overall inflation in both years, and increase by 3.2% in 2026.”
“One caveat to the findings is a threat of resurging inflation due to geopolitical risks including Russia-Ukraine, China-Taiwan, India-China, global food prices, supply chain disruptions, trade wars, and the US elections,” Léonard further added.
Based on Triple-I’s CPI forecast, US P/C replacement costs are projected to increase at a rate 1.75% lower than overall inflation over the next two years. Using the Fed’s lower inflation forecast for comparison, this margin narrows to 0.85%. This follows a period where P/C replacement costs surged relative to overall inflation during and after the pandemic.
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