Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Stagflation Is Quietly Reshaping the Homeowners Insurance Market
Transcript
- Lucas: Luna, I just got my homeowners insurance renewal quote, and I had to read it twice. My premium is up 22 percent from last year. And I live in Ohio — we don't exactly have hurricane season or wildfire risk. Luna: Twenty-two percent? That's wild. And here's the thing — that's actually right in line with the national average for 2025 to 2026. Some states are seeing way worse. Lucas: Right. So let's unpack why this is happening, because it's a perfect stagflation story. On one hand, you've got high inflation pushing up the cost of everything insurers pay for — labor, materials, re-insurance. On the other, you've got slow economic growth, which means fewer new policies written, and more pressure on existing ones. Luna: And that's exactly the bind. Insurers can't just raise rates indefinitely because regulators push back, but if they don't, they're underwriting losses. We saw major carriers pull out of California and Florida entirely. Lucas: Yeah. Let's start with the data. The Consumer Price Index for May came in at 4.2 percent annualized — the highest in three years. But if you look at the insurance sub-component, it's up closer to 20 percent over the same period. That's not just passing through inflation — that's a structural repricing of risk. Luna: And what's driving that repricing? I mean, we talk about climate change and extreme weather, but this year hasn't been especially catastrophic. Is it really just inflation? Lucas: It's a few things layered on top of each other. First, construction costs are still elevated — lumber, roofing, labor. If your house burns down or gets flooded, it costs the insurer more to rebuild. Second, reinsurance — which is basically insurance for insurance companies — has gotten much more expensive. And third, the models are being updated to account for more frequent severe weather even in non-coastal areas. Luna: So it's a compounding effect. Higher input costs, higher catastrophic assumptions, and higher capital costs for the insurers themselves. No wonder premiums are spiking. Lucas: And the stagflation twist is that household incomes aren't keeping up. Average hourly earnings are up about 3.5 percent year-over-year, but insurance premiums are up five times that. So it's a real squeeze on disposable income. Luna: Which has to affect consumer behavior. Are we seeing people drop coverage or switch to higher deductibles? Lucas: We are. The Insurance Information Institute estimates that the share of homeowners without insurance — or underinsured — has crept up to about 12 percent, which is the highest in a decade. And that's a problem because if a big storm hits, those people end up relying on federal assistance, which is just another form of taxpayer cost. Luna: It's like the housing market version of the uninsured problem in health care. And regulators are in a tough spot — they want to keep insurance affordable, but they also want insurers to remain solvent. Lucas: Exactly. Florida's situation is the most dramatic. The state-run insurer of last resort, Citizens Property Insurance, now has over 1.2 million policies. That's up from about 500,000 just three years ago. And if a major hurricane hits, the state would be on the hook for billions. Luna: Right, and Citizens is essentially a tax payer backed insurer. So you've got a private market that's shrinking and a public backstop that's expanding. That feels like a structural shift. Lucas: It does. And California has a similar dynamic with the FAIR Plan. But the difference is that California's problem is more about wildfire risk and regulatory constraints on rate increases. Insurers say they can't charge enough to reflect the true risk, so they leave. Luna: So, is there a 1970s parallel here? I know you've been reading up on that period for the show. Lucas: There is, but it's not exact. In the 1970s, homeowners insurance premiums also outpaced general inflation — they rose about 10 percent per year for a stretch. But the big difference is that the 1970s didn't have the kind of climate risk concentration we see today. That's a uniquely 21st-century factor. Luna: What did they have instead? Urban crime and arson, right? Lucas: Exactly. In the 1970s, the big driver was urban deterioration — arson for profit schemes in declining cities drove up losses. That led to the creation of state-run pools and the federal crime insurance program. So again, you saw government stepping in when the private market couldn't handle the risk. Luna: History rhymes. But back then the crisis was more localized. Now it's almost every state with any kind of weather exposure. And that makes the systemic risk much larger. Lucas: Yeah. And you're seeing it reflected in the stock prices of insurance companies. The S&P 500 Property & Casualty index is down about 8 percent year-to-date, even as the broader market is up. Investors are pricing in higher loss ratios. Luna: So where does this go? Do we end up with a federal backstop for catastrophe insurance, like some people have proposed? Lucas: That's the big question. There have been bills in Congress to create a federal reinsurance program for natural disasters, but they haven't gained traction. The insurance industry is split — some want the backstop, others fear it would crowd out private innovation. Luna: And in a stagflationary environment, the government's fiscal capacity is already strained. So adding another potential liability is a tough sell. Lucas: Right. And that's the tightrope. Meanwhile, consumers are caught in the middle, paying more for less coverage. I think the next two to three years will determine whether we get a fundamental restructuring of the homeowners insurance market or just a cyclical adjustment. Luna: Well, you know what? This is exactly the kind of conversation we try to bring to you every day on Stagflation Conversations. And it's a conversation we're able to have because we don't run ads — no sponsors, no commercials, no interruptions. Lucas: That's right. It's a deliberate choice. If walking through the economy with us has made something click, and you want to support that ad-free approach, you can find us at buy me a coffee dot com slash fexingo. It keeps the show exactly what it is. Luna: Yeah, we really appreciate that. And listeners, it makes a difference. Alright, back to the insurance market — Lucas, you mentioned the regulatory piece. What's happening at the state level right now? Lucas: A few states are experimenting with 'public option' style plans. Washington state launched a public insurance option for homeowners in 2024, but it's only available in certain high-risk areas. Early data shows premiums are about 15 percent lower than private plans, but the risk pool is small. Luna: So it's still unproven at scale. And I imagine private insurers are watching closely. Lucas: Very closely. They worry that a public option could cherry-pick the lower-risk areas and leave them with the high-risk stuff. But that's speculation at this point. Luna: One thing I find interesting is the technology angle — using satellite imagery and AI to assess property risk more accurately. Could that help bring premiums down over time? Lucas: It could, but it's a double-edged sword. Better data means insurers can price risk more precisely — which might lower rates for some homeowners but raise them for others. For example, if your roof has a certain tilt or your property has more trees nearby, your premium could go up. Luna: So it's a redistribution of premium costs, not necessarily a reduction overall. But it could make the market more efficient. Lucas: Exactly. And in a stagflation environment, efficiency matters. If insurers can reduce their loss ratios even a little, that could slow the pace of premium increases. Luna: What about the consumer side? Any tips for listeners who are seeing their premiums spike? Lucas: Shop around — that's the obvious one. But also consider raising your deductible if you have savings to cover it. And check for discounts — some insurers offer lower rates if you have a smart home system or impact-resistant roofing. Luna: And don't forget about bundling with auto insurance. Sometimes that can save 10 to 15 percent. Lucas: Right. But I'd also say — don't drop coverage entirely to save money. That's a dangerous bet. One major storm and you could lose everything. Luna: Good advice. So, to close out — do you think the insurance market will stabilize in the next year? Lucas: I doubt it. As long as construction costs stay high and extreme weather events remain frequent, insurers will keep raising rates. The wildcard is whether we get a federal solution or a series of state-level experiments that end up working. Luna: Sounds like a topic we'll be revisiting. Thanks, Lucas. Lucas: Thanks, Luna. And for our listeners, keep an eye on your renewal notice — and maybe think about that backup plan.