Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Car Insurance Market
Transcript
- Lucas: Luna, I want to talk about something that's hitting nearly every household right now: car insurance. Luna: Oh, don't remind me. My own premium just went up almost 20 percent at renewal. And I haven't had a ticket or an accident in years. Lucas: That's the story everywhere. The Bureau of Labor Statistics data from June — and we're recording this on July 20, 2026 — shows the CPI for motor vehicle insurance is up more than 15 percent year-over-year. And it's been accelerating. Luna: Fifteen percent. That's way above the overall inflation rate. So what's driving it? Lucas: It's a classic stagflation cocktail. On one side, the cost of repairing a car has gone through the roof. Parts, labor, even paint — all expensive. On the other side, we've had more accidents per mile driven since the pandemic, and more severe ones. That pushes up claim frequency and severity simultaneously. Luna: So insurers are just passing those costs through. But can they keep doing that? Lucas: Well, they're trying. But here's the tricky part: even with premium hikes, many insurers are still losing money on their auto underwriting. According to the latest NAIC data I've seen, the combined ratio for private passenger auto — that's claims plus expenses divided by premiums — was around 110 in 2025. For every dollar in premium, they paid out $1.10. Luna: That's unsustainable. So they either raise rates more, or they pull out of certain markets entirely. Lucas: Exactly. And we're starting to see that. A few large carriers have halted new business in states like California and Florida, where regulatory caps make it hard to price risk accurately. That leaves fewer options for consumers, and less competition actually fuels further price increases. Luna: It feels like a vicious cycle. Higher costs lead to fewer insurers, which leads to higher prices, which leads to more people shopping around — but there's nowhere to go. Lucas: Right. And it's not just about parts and labor. There's also a liability factor. With social inflation — more lawsuits, larger jury awards — insurers are setting aside more reserves for bodily injury claims. That adds another layer of cost. Luna: I've heard that term 'social inflation' a lot. Is it real, or is it just an industry excuse? Lucas: It's real, though the magnitude is debated. A study from the Insurance Information Institute last year showed that average verdicts in auto liability cases have doubled over the past decade, adjusted for inflation. And third-party litigation funding is making it easier to bring cases. Luna: So insurers are pricing in worst-case scenarios. Lucas: Exactly. Now, the good news is that premium growth eventually slows if claims costs stabilize. But we're not there yet. The core PCE price index, which the Fed watches, was still up in May — 130.1 from 129.67 in April. That's not a dramatic drop. Luna: And the ten-year breakeven inflation rate last week was 2.24 percent, up a couple basis points. So the bond market isn't convinced inflation is dead. Lucas: No. And for car insurance, the lag between cost increases and rate filings means we probably haven't seen the peak yet. State insurance commissioners have to approve rate changes, and that process can take months. Luna: So what's a driver supposed to do? Other than just pay the bill. Lucas: Shop around is the obvious one, but as you said, options are narrowing. Raising deductibles can help — moving from $500 to $1,000 might cut your premium by 15 to 20 percent. Also, check for usage-based insurance programs. If you're a low-mileage driver, you could save big. Luna: That makes sense. But I also wonder if we're heading toward a 'hard market' like the early 2000s, when rates spiked and availability shrank for years. Lucas: I think we're already in the early stages of one. The difference is that this time, the underlying inflation is broader — it's not just insurance-specific. Stagflation makes it harder for insurers to invest their float profitably, too. Bonds yield more now, but if inflation eats those returns, it's not as helpful. Luna: Speaking of that — if walking through the economy with us has made something click, or helped you navigate your own insurance renewal, you can support the show at buy me a coffee dot com slash fexingo. All lowercase. That kind of support is what keeps this ad-free and lets us dig into topics like this without sponsorship constraints. Lucas: Yeah, it really does make a difference. We get no outside funding, so listener support is how we keep the lights on. And we're grateful for everyone who chips in. Luna: Alright, back to insurance. Lucas, do you think we'll see regulatory intervention, like price caps or state-run insurers? Lucas: I think it's possible in some states if the market tightens further. Florida already has a state-run insurer of last resort for property — Citizens — but for auto, it's less common. However, if major carriers keep restricting new business, states may feel pressure to act. Luna: And that could create its own problems — like underpricing risk and creating deficits. Lucas: Exactly. It's a tough balance. For now, the best we can do is understand the forces at play and make informed choices. The industry is in the middle of a structural repricing, and it's not over yet.