Insurance Perspective

Jordan Tirone

DeSanctis Insurance Agency, Inc.

The “I” Word, Inflation and How it is Impacting the Other “I” Word, Insurance

Inflation as of late has seemingly become a household word used to describe the challenges of an everyday consumer. Every household and business is feeling the impacts of the current inflation state whether it is at the gas pump or in the grocery store checkout line.

From a historical standpoint, we can look back to the late 1970s and early 1980s as a comparison. This period of time presented the challenges of extended inflation levels and rising interest rates, a recipe for significant rises in the cost of living.

For those that enjoy the raw statistics; the Consumer Price Index (CPI) rose 5.4% (annualized) in September 2021, which marks the highest rate since mid 2008 and 2½ times greater than the average 10-year period. The factors behind the scenes include, but are not limited to pandemic related labor shortages, supply chain issues and what I feel to be most significant, uncertainty as it relates to the economic future. Uncertainty results in panic and panic results in higher costs. 2020 was an adverse year for the commercial insurance industry (upon many others in the private public sectors). However, there has been traction gained thus far in 2021, that can be seen in a positive light as an end consumer. Some of the catalysts are that pandemic-related losses and or business closures have relatively plateaued and outside investment income gains, much to a surprise, have remained steady. However, it remains uncertain whether reserve levels (the amount an insurance carrier hold for claims) can keep pace with the rising inflation costs. On a positive note, information systems technology and artificial intelligence modeling has grown leaps and bounds, allowing the insurance industry the ability to more accurately predict future results and respond more proactively to adverse trends.

The negative affects within the property and casualty market related to inflation are being seen predominantly within the physical property and auto claims sector. Driven by the challenges presented by high cost of replacement materials, auto inventory, and the shortage of skilled labor have adversely spiked this sector. Medical and litigation costs are also rising, which are increasing cost factors of long-term claims and settlements.

The volatile loss trend lines of insurance, such as automobile and workers comp operate with very thin loss/profit margins, which can be quickly diminished by a continuous rise in inflation rates. From an insurance carrier perspective, carriers that have more significant long term open claims, such as injury settlements are most exposed to a constant multiyear rise in inflation.

Overall, when reviewing historical data within the property and casualty market, the industry is much more adequately positioned to absorb a period of continuous rising inflation than they have been in the past, which provides a level of optimism moving forward for

the everyday consumer. n

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