Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Reshaping the Homeowners Insurance Market
Transcript
- Lucas: So earlier this week, I got my homeowners insurance renewal notice, and I nearly dropped my coffee. The premium was up 18 percent from last year. And I live in a low-risk area—no flood zone, no wildfire history. Luna: Eighteen percent? That's almost three times the overall inflation rate. Core CPI is running around 4.2 percent year-over-year as of May. Lucas: Right. And that gap—between premium hikes and general inflation—is the story we need to talk about today. Because in a stagflation environment, where prices are sticky high and growth is sluggish, homeowners insurance is becoming a real pressure point for household budgets. Luna: We've seen this movie before—sort of. In the 1970s, insurance costs also outpaced inflation, partly because of social inflation and rising litigation. But today there's a new villain: climate risk. Lucas: Exactly. Let's start with the numbers. The latest CPI data shows overall consumer prices at 334.0, but the insurance component—especially homeowners—has been rising at a double-digit clip. In states like Florida and California, premiums have jumped 15 to 20 percent this year alone. Luna: And it's not just the premiums. It's the availability. Major insurers like State Farm and Allstate have stopped writing new policies in California. In Florida, some carriers have gone bankrupt. Lucas: That's the stagflation double whammy. Slow growth means fewer new homes being built, so the existing housing stock is more valuable. But high inflation means rebuilding costs—lumber, labor, roofing—are through the roof. Insurers are repricing risk in real time. Luna: And the labor market is tight. Unemployment is at 4.2 percent, but the labor force participation rate just dropped to a 50-year low outside the pandemic era. Fewer people available to work as claims adjusters or roofers means longer claims cycles and higher costs. Lucas: That's a great point. The JOLTS data showed job openings ticking up slightly to 7.6 million, but the construction sector is still short of workers. So when a hailstorm hits, the backlog of claims grows, and insurers pass those costs back to policyholders. Luna: Let's talk about the tools insurers are using. I've been reading about ai driven underwriting models that micro-price policies based on satellite imagery, historical claims data, even credit scores. It's getting very granular. Lucas: Yeah, and that's controversial. In some states, regulators are pushing back on using credit-based insurance scores, arguing it penalizes low-income homeowners. But insurers say they need every data point to price accurately in a volatile environment. Luna: The reinsurance market is also a factor. Global reinsurers like Swiss Re and Munich Re have been raising rates sharply after a few years of big catastrophe losses. That flows down to primary insurers, then to homeowners. Lucas: Right. And when you layer in the macroeconomic picture—real GDP growth is only 2.1 percent annualized, so we're not exactly booming—households are feeling squeezed. Wage growth is modest, about 3.6 percent year-over-year in average hourly earnings. Premium hikes are eating into that. Luna: So what's the endgame? Do we see a regulatory response? Some states have imposed rate caps, but then insurers just pull out. Lucas: We're already seeing a patchwork. California has Proposition 103, which requires prior approval for rate hikes, but that's led to a logjam. Florida has created a reinsurance fund to stabilize the market, but it's expensive and may not be sustainable long-term. Luna: There's also the federal angle. The National Flood Insurance Program is deep in the red, and Congress keeps kicking the can. But that's a whole other episode. Lucas: For now, the takeaway is that homeowners insurance is becoming a bigger share of the cost of homeownership—and in a stagflation environment, that's a hidden tax on housing. If you're a renter, you're not immune either; landlords pass on higher insurance costs. Luna: And if you're listening and thinking about buying a home, you need to factor in insurance costs as a variable expense, not a fixed one. They can jump significantly year to year. Lucas: It's a good reminder that running through the economy with us—looking at these connections—can help make sense of what's happening to your own finances. And that's actually why we keep this show free of ads. We want you to get the insight without the interruption. Luna: Yeah, no ads, no sponsors, no trying to sell you something. Just the analysis. If that's valuable to you and you'd like to support it, you can find us at buy me a coffee dot com slash fexingo. Lucas: And we really appreciate that. It keeps us independent. So, back to the insurance market—one more thing I want to highlight: the concept of 'underinsurance.' A lot of homeowners haven't updated their coverage limits in years, and with inflation, they're now underinsured by 20 or 30 percent. Luna: That's a ticking time bomb. If a major disaster hits, they could be out of pocket for a huge portion of rebuilding costs. Lucas: Exactly. So the advice is to review your policy annually, get replacement cost estimates, and consider an inflation guard endorsement. It's not exciting, but it's crucial. Luna: And for policymakers, the challenge is to balance affordability with insurer solvency. Because if insurers can't make money, they leave. And then you have a crisis of availability. Lucas: Right. So the question we're left with—and I don't have an answer—is whether the current model of private insurance for climate-exposed homes is viable long-term. Or do we need a larger government backstop? Luna: That's the trillion-dollar question. And with a slow-growth, high-inflation backdrop, it's only going to get more urgent. Lucas: We'll be watching. And we'll keep you posted.