Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Quietly Reshaping Insurance Premiums
Transcript
- Lucas: If you've opened your homeowners or auto insurance renewal lately, you probably noticed the number jumped more than your usual annual bump. That's not a coincidence — it's a direct consequence of the stagflation environment we've been tracking. Luna: I just got mine last month — auto policy went up almost 15 percent. I thought it was just me, but apparently it's widespread. Lucas: It's very widespread. And this is a really interesting angle on stagflation because insurance pricing is one of those places where standard inflation metrics like CPI or PCE don't tell the whole story. The Bureau of Labor Statistics does track insurance in the CPI, but it's a lagging indicator and it misses the structural shifts insurers are dealing with right now. Luna: So what's actually driving the increases? Is it just higher repair costs from inflation, or is there something else going on? Lucas: It's a few things compounding. First, replacement costs for homes and cars have gone up significantly. Lumber, copper, labor — all the inputs for rebuilding a house or repairing a car are more expensive. But on top of that, insurers are also repricing for risk in a way they haven't had to in over a decade. The underwriting cycle is turning hard. Luna: Right, and that's partly because investment income for insurers — the float they earn on premiums before paying claims — isn't what it used to be. Even with higher interest rates, the bond portfolios they hold have been hit by duration losses. Lucas: Exactly. So they need to raise premiums just to maintain their combined ratio. The result is that property and casualty insurance costs are rising at an annual rate around 12 to 15 percent in many states. And this isn't just a coastal California or Florida problem — it's happening in the Midwest and Texas too. Luna: And that feeds back into the stagflation narrative. For households, this is effectively a regressive tax. It hits people who own cars and homes, but renters aren't immune either — renters insurance is up, and landlords are passing along higher costs in rents. Lucas: We deliberately don't run ads on these because we want this to be a resource that's completely listener-supported. If you'd like to help keep it that way, the link is buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that makes a big difference for us. Appreciate anyone who does. Lucas: So back to the numbers — the latest PCE data from April showed core inflation at 3.3 percent year over year, which is still well above the Fed's target. And the Fed's preferred inflation gauge, the PCE, includes some insurance components but not all of them. The CPI, which gets more attention, actually underweights insurance relative to its share of household budgets. Luna: Which means that the real hit to consumers from insurance inflation is even greater than headline numbers suggest. Lucas: Exactly. And here's where the stagflation part really bites. Normally, insurance premiums rise in a growing economy because there's more economic activity and more claims. But right now, we have slow GDP growth — real GDP grew at an annualized rate of just 1.6 percent in the first quarter — and yet premiums are surging. That's the worst combination for households. Luna: And the job market isn't exactly booming either. Unemployment is at 4.3 percent, which is historically low, but job openings are falling — JOLTS came in at 6.9 million in March, down from 6.9 million the month before? Wait, actually it was down to 6.9 million? Let me check — the data says 6.9 million in March, down from 6.9 million. That's basically flat. Lucas: Right, it's plateauing. So the labor market is not generating the kind of wage growth that would offset these insurance cost increases. Average hourly earnings were up just a few cents to $37.40 in April. That's about 3 percent annualized, but insurance is going up four to five times that. Luna: So what can households do? Is there any way to push back, or are you just stuck paying more? Lucas: There are a few things. First, shop around every year — loyalty doesn't pay in insurance. Second, raise your deductibles if you have an emergency fund. That can lower premiums significantly. Third, bundle home and auto with the same carrier. But the reality is that the underlying cost pressures are so broad that most people will see higher bills regardless. Luna: And it's not just personal lines. Commercial insurance — liability, property, workers' comp — is also rising. That feeds into higher prices for goods and services across the board. Lucas: Yes, and that's a second-order stagflation effect. A manufacturer's insurance costs go up, they pass it on in pricing. So insurance inflation becomes a hidden contributor to overall inflation. The Fed can raise rates all it wants, but it can't directly control the cost of rebuilding a house or the frequency of hailstorms. Luna: And weather-related claims have been increasing too. That's a longer-term trend that's compounding the cyclical pressures. Lucas: Absolutely. Some of the biggest premium increases are in states like Texas, Oklahoma, and Colorado where severe convective storms — hail, tornadoes — have become more frequent. Reinsurers are pulling back capacity, which forces primary insurers to raise rates or restrict coverage. It's a perfect storm, no pun intended. Luna: So where does this go from here? Are we looking at a plateau, or do these increases keep accelerating? Lucas: I think we're in the middle of a multi-year repricing. Insurers have been underwriting at a loss for several years, and they're catching up. As long as replacement costs and litigation costs remain elevated, premiums will keep rising. The Fed can't really do much about it — monetary policy doesn't fix supply chain driven repair costs. Luna: So it's another way that stagflation becomes entrenched. It's not just energy and food — it's everything from your car insurance to your homeowners policy. Lucas: Exactly. And that's why we're doing this series — to shine a light on these less obvious channels. Next episode, we'll look at how stagflation is affecting something even more unexpected: the cost of borrowing for municipal governments. Luna: That sounds like a good one. Municipal bonds in a stagflation environment — there's a lot going on there.