The uncertainty generated by the debt ceiling debate will likely exacerbate replacement cost inflation that has put upward pressure on property/casualty insurers’ loss ratios and, ultimately, on carrier rates. consumer premiums, according to Triple-I’s chief economist.
“Whether or not we go to five, 10, 20 days, or if we don’t have a shutdown at all, this signals to the market a dysfunction in terms of government operations,” said Dr. Michel Léonard, head of Triple-I. economist and data scientist in an interview with Triple-I CEO Sean Kevelighan. “That leads to higher interest rates… which fuels inflation and reduces growth.”
As material and labor costs rise, home and vehicle repairs become more expensive, driving up insurer losses and pushing premium rates up. For a P/C industry already struggling with high replacement costs and trying to grow with the rest of the economy, Léonard said: “This [debt limit debate] adds to those challenges.”
Kevelighan, whose background includes working in the US Treasury Department during the George W. Bush administration, called high replacement costs a “new normal.”
“You have to look at the replacement costs year after year, and they are high,” Kevelighan said. “Replacement costs for personal homeowners increased 55 percent. We have personal car replacement costs up to 45 percent. And if inflation turns negative, we’re in an even worse place.”
Léonard noted that the federal government has shut down 21 times since 1976, with shutdowns lasting up to 35 days or as little as a few hours. In the interview above, he explains how they have typically played out and what types of scenarios could play out.
How Inflation Affects Property Insurance Rates and How It Doesn’t (Triple-I Issues Summary)
Commercial lines partially offset underwriting losses from personal lines in P/C’s 2022 results (Triple-I Blog)