The uncertainty created by the debt ceiling debate is likely to exacerbate replacement cost inflation, which Triple-I’s chief economist said has put upward pressure on property-casualty insurers’ loss ratios and ultimately consumer premium rates.
“Whether or not we move to five, 10, 20 days — or no shutdown at all — this is signaling dysfunction to the market in terms of government business,” said Dr. Triple-I chief economist and data scientist Michel Léonard interviewed by Triple-I CEO Sean Kevelighan. “That leads to higher interest rates … which fuels inflation and slows down growth.”
As material and labor costs rise, home and vehicle repairs become more expensive, driving up insurers’ losses and putting upward pressure on premium rates. 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] contributes to these challenges.”
Kevelighan — who worked at the US Treasury Department during the George W. Bush administration, among others — called high replacement costs the “new normal.”
“You have to look at the replacement cost over a one-year to three-year period, and it’s high,” Kevelighan said. “The cost of replacing private homes has increased by 55 percent. We’ve increased the cost of replacing private cars by 45 percent. And if inflation turns negative, we’re even worse off.”
Léonard pointed out that the federal government has closed 21 times since 1976, with closures lasting up to 35 days or just a few hours. In the interview above, he explains how these have typically developed and what scenarios we could face.
Learn more:
How Inflation Affects Property Insurance Rates — And How It Doesn’t (Triple-I Issues Brief)
Commercial insurance partially offset personal insurance underwriting losses in 2022 P/C results (Triple I blog)
