Inflation puts pressure on insurers, policyholders

The 6.8% annual increase in the consumer price index reported last week provided more evidence of higher inflationary trends in the United States, but economists and insurance industry executives say the higher prices may be only a short- or medium-term issue for the sector.

The COVID-19 pandemic is the main driver of price hikes, and supply and demand imbalances should normalize over the next two or so years, they say.

The spike in inflation, however, has rippled through the insurance industry from higher construction and auto fleet costs to valuation reviews that are surprising some. The uncertainty caused by the uneven emergence of businesses from the pandemic has made coping with the changes more difficult, and the emergence of the omicron coronavirus variant could complicate recovery efforts further.

After several months of above-average increases, inflation may be beginning to moderate. While the annual rate of inflation is at its highest in decades, the U.S. Bureau of Labor Statistics reported Friday that the consumer price index increased 0.8% in November, on a seasonally adjusted basis, after rising 0.9% in October.

Economists say the global disruption tied to the pandemic has been the root cause of the current economic inflation and uncertainty. 

“There’s no question without the pandemic we wouldn’t have had this inflation,” said Robert Hartwig, clinical associate professor and director, Risk and Uncertainty Management Center, at the University of South Carolina’s Darla Moore School of Business, adding that “economists are the least surprised group” that inflation is occurring.

He added, however, that many of the factors that drove the consumer price index so high in October are already receding, with energy prices and futures lower and supply chain disruptions easing.

“This is a pandemic story,” said Thomas Holzheu, Armonk, New York-based chief economist Americas for Swiss Re Ltd. What started as a health crisis, with lockdowns and social distancing, turned into an unprecedented labor market crisis and ultimately into a global economic crisis, he said.

Supply chain disruptions that followed extreme swings in demand and changing preferences related to working from home have helped create mismatches in supply and demand, including housing changes as people relocated, driving homebuilding costs higher. “All of this comes from COVID,” Mr. Holzheu said.

Both economists noted that the most recent data and statistics are subject to a “base effect” because some economic indicators and metrics were depressed last year due to the effects of the COVID-19-related economic slowdown.

Michel Leonard, vice president, senior economist and data scientist, and head of the economics and analytics department in New York for the Insurance Information Institute, said that this period of inflation is supply driven and not demand driven.

“Significant economic, pandemic and geopolitical threats to recovery remain,” Mr. Leonard said in his presentation at the Joint Industry Forum in New York earlier this month. The emergence of the omicron variant is already leading to new restrictions and introducing added uncertainty to the budding recovery.

Although the reopening of economies is inconsistent and there are still mismatches between supply and demand, these are expected to “work themselves out but it’s taking a little longer than expected and will definitely stretch into 2022,” Mr. Holzheu said.

“As manufacturing ramps up and supply chain issues ease, that should alleviate over time, but there’s still a shortage that needs to be caught up,” said Karen Collins, an assistant vice president in Sacramento, California, for the American Property Casualty Insurance Association.

Materials needed for construction and repair on property insurance lines started to become “constrained” toward the end of 2020 and commercial auto was hit by supply chain disruption, extending repair times and becoming subject to labor shortages and further inflation, Ms. Collins said. Replacement costs for large fleets are also increasing due to supply and labor shortages in new vehicle production and extended repair times, she said.

Inflation is hitting the insurance industry hard in some coverage areas, said Marcus Winter, president and CEO of Munich Re U.S.

“The inflation for insurers right now is much higher than the average CPI inflation … particularly by the combination of increased costs for labor and material. Lumber costs have reduced a bit since their peak earlier this year but are still almost 40% higher than in 2019, and other construction materials such as steel, concrete and gypsum” are also showing above-average increases in price, he said.

One tool for combatting the rising costs is risk mitigation and control, Ms. Collins said.

Given the uptick in prices and fluctuations in rebuilding and replacement costs, policyholders must be increasingly confident and up to date with data concerning insured values, said Tim Ramsayer, valuation practice leader for Marsh Advisory, a division of Marsh LLC, in New York.

Mr. Ramsayer said policyholders can undertake valuation studies on their schedule of assets to ensure that data is accurate and reflects inflation, fluctuations in pricing and added uncertainty of emerging from the pandemic.

“There are some clients going through this exercise right now and being very surprised by the increase in values,” Mr. Ramsayer said.

Insurers also are reviewing the insured values of properties they cover, Munich Re’s Mr. Winter said.

“Insurance companies have seen the impact of inflation in their portfolios already at the end of 2020 and the beginning of 2021 and have already reacted to the current and future expected inflationary environment by adjusting insured property values and insured limits to maintain proper insurance to value,” he said.

Christopher Lewis

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