A recent report from the Insurance Information Institute (Triple-I) highlights a deceleration in the growth of replacement costs for property and casualty (P&C) insurance in the United States, trailing behind the overall inflation rate. However, the Triple-I predicts a reversal of this trend, forecasting that P&C replacement costs will outpace general inflation by the year 2026.
The latest Insurance Economics Outlook from Triple-I reveals that replacement costs for P&C insurance increased by 1.5% during the first half of 2024, significantly lower than the broader inflation rate of 3.5%. This slowdown in replacement cost growth may offer temporary relief to insurers, but the outlook suggests that pressures from rising replacement costs will intensify in the coming years, likely resulting in insurance premium hikes.
According to the Triple-I study, although the Consumer Price Index (CPI) experienced a year-over-year decline of 4.1%, there has been a slight upward trajectory since the start of 2024. This uptick, rising from 3.1% in January to 3.5% in March, does not provide a definitive indication of future trends, given the similar fluctuations observed throughout 2023, as noted by Triple-I.
Dr. Michel Léonard, Chief Economist and Data Scientist at Triple-I, emphasized that the volatility in CPI changes and replacement costs could impact the P&C insurance outlook in the upcoming years. “We anticipate P&C replacement costs to rise by 1.5% in 2024 and 2.5% in 2025, trailing behind overall inflation during these periods, and then increase by 3.2% in 2026,” he stated.
Factors Behind the Projected Increase
The anticipated rise in P&C replacement costs can be attributed to several factors, including a previous surge in construction materials and labor expenses, which escalated by 55% between 2019 and 2022. This increase was nearly four times higher than the CPI over the same timeframe.
While the current deceleration may seem favorable for insurers and policyholders, geopolitical tensions—such as those in regions like Russia-Ukraine and China-Taiwan—could fuel inflation, impacting supply chains, global food prices, and trade relations. Triple-I highlighted these geopolitical risks as potential contributors to renewed inflation pressures, ultimately affecting replacement costs and insurance premiums.
Looking ahead, Triple-I forecasts that US inflation will remain relatively steady for the remainder of 2024, hovering around 3.5%. Nevertheless, with P&C replacement costs projected to surpass inflation rates by 2026, insurers and policyholders should be prepared for potential shifts in the insurance landscape.
