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A Big Question Hanging Over The Insurance Industry
July 12, 2022
A pandemic followed by a war have brought worldwide inflation not seen in decades, and given that property insurance claims are a function of the cost to repair or replace, “the question currently hanging over the global (re)insurance industry is how rising prices will affect balance sheets,” says a post from RMS, a Moody’s risk modeling and analytics company.
The answer to that question, according to RMS, is more complicated than many realize. Measurement and prediction, as always, are crucial for the industry, but in this case conventional measures like the Consumer Price Index (CPI) don’t work. Most of what’s in the CPI market basket has little or no bearing on the cost of construction. A better indicator is the U.S. Bureau of Labor Statistics Producer Price Index (PPI) of residential construction inputs, and it shows inflation in the residential housing sector is both higher and more volatile than general consumer inflation. Since 2020, there have even been brief periods of deflation, due to seasonal fluctuations in demand, Covid lockdowns and other factors, and going back to 2018, the variations have been even more pronounced. The price of lumber, for example, has been all over the map.
“For insurers quantifying the impact of inflationary trends on their book of business, it’s important to track an index with the appropriate level of specificity, like the PPI construction cost index, and understand not only long-term trends but the impacts of short-term fluctuations as well,” says the RMS post. “While consumer inflation and CPI appear to be on an unrelenting upward path globally, indices more relevant to property insurers show a more complicated picture.”
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