Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Auto Insurance Industry
Transcript
- Lucas: So if you've opened your auto insurance renewal notice recently, you've probably noticed the premium went up — again. And that's not just your imagination. In a stagflation environment, where growth is sluggish but prices keep climbing, auto insurers are caught in a perfect storm. Luna: I've definitely seen it. My own premium jumped like twelve percent last year. But why is this happening more than, say, other sectors? Lucas: Well, the core issue is that claim costs are inflating faster than overall inflation. Think about it — parts, labor, even the cost of a rental car while your vehicle is in the shop. All of that is rising, and insurers have to price that into premiums, or they go broke. Luna: And that's not even counting the fact that cars themselves are more expensive to repair, with all the sensors and cameras. Lucas: Exactly. Modern cars are like computers on wheels, and a minor fender bender can easily run into five figures because of expensive sensors and calibration. So the average claim severity has been climbing steadily. And with real GDP growth at just one point five percent annualized as of the second quarter, insurers can't rely on a booming economy to offset those costs. Luna: So it's a squeeze. But aren't they also making money on investments? I thought insurers invest premiums in bonds. Lucas: They do, and that's actually a bright spot in a stagflation scenario. With longer-duration bonds yielding more now than they did a few years ago, investment income has improved. But the flip side is that inflation erodes the real value of those bond portfolios over time. So it's a mixed bag. Luna: Okay, so what's happening with the actual pricing? Are we seeing double-digit increases across the board? Lucas: It depends on the state and the market, but yes, many states have seen rate filings in the double digits. The national average premium has been rising at a pace well above headline inflation for a couple of years now. And that's because insurers are playing catch-up after a period of underwriting losses. Luna: Underwriting losses — meaning they were paying out more in claims than they were taking in from premiums. That's not sustainable. Lucas: Right. So now they're pushing hard to get rates back to profitability. But it's not just about raising prices. They're also getting smarter about risk selection. That's where telematics and usage-based insurance come in. Luna: Oh, that's the little device they plug into your car or the app on your phone. How does that actually help in a stagflation era? Lucas: It helps because it lets insurers price more accurately based on how you actually drive, not just on age, gender, and zip code. So a safe driver who drives little can get a discount, which helps affordability. But it also means riskier drivers pay more. In a slow-growth economy, that's a way to balance the book without just blanket-raising everyone's premium. Luna: So there's a trade-off. Privacy for potentially lower rates. Lucas: That's the deal. And it's been growing in adoption. But there's also regulatory pressure. In some states, like California, regulators have been cautious about these models and have capped rate increases, which has led some insurers to pull back or limit new policies. That creates a different kind of problem — less competition, and for consumers, fewer choices. Luna: So in California, are we seeing drivers struggle to find coverage at any price? Lucas: Yeah, it's been tough. Some major carriers have reduced their appetite in the state, and that's pushed more drivers into the high-risk pool, where premiums can be astronomical. It's a real pinch point. Luna: That's a pretty concrete example of how stagflation and regulation can collide. And it makes me think — what's the actual impact on the consumer's wallet? We have CPI data from July showing core prices still sticky, up a bit from June. How does that translate to what people pay for car insurance? Lucas: Well, auto insurance is actually a component of CPI, and it's been one of the stickier pieces. Even as headline inflation has moderated, insurance costs have stayed elevated. That's because the pricing adjustments lag behind claim cost inflation. So consumers are feeling this squeeze even as the overall inflation numbers cool. Luna: So that's the 'slow growth, high prices' dynamic in action. And I guess that's exactly the kind of thing we try to make sense of on this show. Speaking of which — a lot of you have asked how you can support the podcast. If walking through the economy with us has made something click, a couple of dollars a month is genuinely what keeps these going. You can do that at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small thing that makes a real difference for us. And we don't have to sell ads or put the show behind a paywall. So if you've gotten something out of it, that's a great way to give back. Luna: And we really do read those messages. It's nice to know what's resonating. Lucas: Alright, back to the numbers. One thing that stands out in the latest data is that job openings have been falling — down to seven point three five nine million in June, the lowest in a while. In a stagflation environment, that's a sign of cooling labor demand, which could eventually ease wage pressure. But wages are still growing, and that feeds into claim costs. Luna: Because if wages are going up, repairs and medical costs go up too. So the pressure on insurers continues. Lucas: Precisely. And that's why you're seeing insurers get more aggressive with AI and machine learning to automate claims processing and detect fraud. It's not just about cutting costs — it's about speed and accuracy. In a high-cost environment, that efficiency becomes critical. Luna: So what does that mean for the consumer? Are we going to see premiums keep climbing forever? Lucas: Probably not forever, but certainly for the near term. As long as claim costs rise faster than general inflation, premiums will keep chasing that. Eventually, the market will stabilize, but it's not going to happen overnight. And in a stagflation scenario, that adjustment period stretches out. Luna: So for a listener who's looking at their renewal notice right now, what's the actionable takeaway? Lucas: First, shop around. Rates vary significantly by insurer, and with telematics, you might find a better deal if you're a safe driver. Second, consider raising your deductible if you can afford it — that lowers your premium. And third, keep an eye on your policy details. Make sure you're not overpaying for coverage you don't need. Luna: Good advice. And maybe check if your state has any consumer assistance programs or rate comparison tools. Lucas: Definitely. And one more thing — don't just accept the automatic renewal. That's the default, and it's often the most expensive option. A little time spent comparing can save you a couple hundred dollars. Luna: Which, in a slow-growth economy, is real money. So, Lucas, do you think the insurance industry is fundamentally changing because of stagflation, or is this just a cyclical blip? Lucas: I think it's a mix. The cyclical part is the repricing we're seeing now. But the structural change is the adoption of technology to manage risk more precisely. Stagflation is accelerating that. I don't think we're going back to the old model of just charging everyone based on a few demographic factors. Luna: So the future is more personalized, but also more data-driven. That feels like a double-edged sword for consumers. Lucas: It is. But I'd argue that in a stagflation world, having more transparency about how your rate is calculated is a net positive. It gives you more control. Luna: That's a good note to end on. Next time you get that renewal notice, at least you'll know why it's going up. Lucas: Exactly. And maybe you'll shop around a bit more. That's the smart move in this environment.