Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Insurance Industry
Transcript
- Lucas: So we talk a lot on this show about how stagflation reshapes markets — silver, comic books, craft breweries. But there is one industry that touches nearly every household and is getting absolutely crushed right now, and it does not get nearly the attention it deserves. Luna: Let me guess — insurance? Lucas: Property and casualty insurance, specifically. And the numbers are wild. We just got CPI for May at 334 — up about half a percent from the prior month. Core PCE at 129.6. Meanwhile real GDP growth annualized is sitting at 1.6 percent. That is textbook stagflation — high inflation, low growth. Luna: Right, and insurers are stuck in the middle. Their costs — labor, parts, building materials — are all going up, but they can only raise premiums so fast without losing customers. Lucas: Exactly. And it is not just that costs are rising. The nature of insurance means there is a lag. You price a policy based on last year's claims data, but when inflation is running hot, the repair bill six months from now is way higher than you expected. That is called claims inflation, and it is eating insurers alive. Luna: I saw that Allstate and State Farm both posted underwriting losses in their auto lines last quarter. And GEICO had to pull back on advertising just to preserve capital. Lucas: Right. And the response is what you would expect — they are jacking up rates. Auto insurance premiums nationally are up something like 15 percent year-over-year. Homeowners is even worse in states prone to natural disasters, but even in relatively calm areas you are seeing double-digit increases. Luna: And that feeds back into inflation. Because insurance costs are part of CPI — they account for about 3 percent of the basket. So higher premiums actually push CPI higher, which makes the Fed's job harder. Lucas: Bingo. It is a vicious cycle. And it mirrors the late 1970s in a striking way. Back then, the property-casualty industry went through what they call a hard market — premiums spiked, capacity tightened, and some lines of coverage became nearly impossible to get. Sound familiar? Luna: Yeah, we are seeing that now. Some insurers are pulling out of certain states altogether — California, Florida, Louisiana. They just say the risk is not worth it at any price. Lucas: And that pushes more people into the so-called non-admitted market — surplus lines insurers that are less regulated but charge higher rates. It is a huge shift in how risk is distributed across the economy. Luna: So what does this mean for the average listener? I mean, if you own a car or a home, you are feeling this directly. Lucas: You are. And the most practical takeaway is that you should expect premiums to keep rising for at least another 12 to 18 months. Insurers are still playing catch-up with claims inflation. The average auto claim now costs about 20 percent more than it did two years ago, mainly because of higher parts prices and more expensive repairs — think advanced sensors and cameras on newer cars. Luna: And for homeowners, the cost to rebuild a house has gone up because lumber and labor are both pricier. So even if your house value hasn't changed much, the replacement cost has. Lucas: That is a key point. A lot of people are underinsured because they haven't updated their dwelling coverage limits. If your policy still reflects replacement costs from 2021, you could be in for a nasty surprise if you actually have a claim. Luna: So the advice is to check your coverage limits and consider an inflation guard endorsement if your carrier offers it. Lucas: Absolutely. And look at raising your deductible if you can handle the risk — that can lower your premium significantly. But also shop around. Insurers are pricing all over the map right now, and the difference between the cheapest and most expensive quote for the same coverage can be hundreds of dollars a year. Luna: It is interesting — you know, we talk about stagflation as this macro phenomenon, but insurance is one of the most tangible ways it hits people's wallets. It is not just abstract numbers. Lucas: No, it is a direct line from the CPI report to your mailbox. And one thing I want to highlight: the industry is also seeing a rise in parametric insurance — products that pay out based on an index, like a temperature threshold or rainfall level, rather than actual losses. That is an innovation born out of this hard market. Luna: Right — because traditional insurers are pulling back from certain risks, parametric fills the gap. It is faster to settle, too. Lucas: Exactly. And we are seeing that more in agriculture and energy, but it could trickle down to consumers eventually. For now though, the main story is higher prices and tighter underwriting. Luna: And that is a good segue — you know, if walking through the economy with us has made something click, it is worth mentioning that listener support is what keeps this show ad-free. A couple of dollars a month genuinely makes a difference — buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does. And we appreciate everyone who has chipped in. It keeps us independent and able to dig into these topics without commercial pressure. Luna: So back to insurance — one other angle I want to bring up. The commercial side. Small businesses are getting hammered too, especially in sectors like restaurants and construction. Their liability and property premiums are soaring. Lucas: That is a huge hidden cost in the economy. When a small business has to pay 20 percent more for insurance, that either eats into margins or gets passed on to customers. And in a stagflation environment, passing costs along is harder because consumers are already squeezed. Luna: So it is another channel through which stagflation suppresses growth — higher business costs lead to less hiring, less investment. Lucas: Right. And we already saw that factory job cuts in June neared levels not seen since the financial crisis and Covid. That is from an S&P report. The insurance cost piece is not the only factor, but it is a contributor. Luna: I also wonder about the regulatory side. Some states have rate approval processes that delay premium increases. That can make insurers reluctant to write new policies in those states. Lucas: That is exactly what is happening. In states like California, where rate changes need prior approval, insurers are limiting new business. And that is pushing more consumers into the California FAIR Plan, which is basically a last-resort insurer — and its rates are much higher. Luna: So the market is bifurcating: a standard market with high but still regulated prices, and a surplus market with even higher prices and less consumer protection. Lucas: Right. And this is a structural shift that could persist even after inflation cools, because insurers have learned that they need to price for volatility, not just the current trend. Luna: That is a important long-term implication. The insurance cycle could be permanently reset to a higher premium baseline. Lucas: Exactly. And if we look at the 1970s, that is what happened — the hard market of the late 70s was followed by a period of relatively high premiums that lasted into the 80s. It took years for the industry to normalize. Luna: So the echo is real. We are in that pattern again. Lucas: We are. And the next time you get your renewal notice, you will understand why — and hopefully, you can do something about it.