- Insurance is making national headlines in 2023 as major providers retreat from writing new policies in large parts of the country and renewal premium prices skyrocket. Elevated asset valuations, escalating rebuilding costs, and larger and more frequent natural disasters have lowered the insurers’ profitability and are likely to result in sustained premium price hikes in the coming years.
- Insurance is a central input to the US economy. As an economically connected and highly regulated industry, the inflationary impacts of disruptions to insurance typically transmit through the economy over multiple years and that is our base case for this cycle as well.
- In our tactical multi-asset portfolios like the BlackRock Tactical Opportunities Fund, we hold a sizeable short to property & casualty insurance within our industry rotation strategy. The historical precedent for insurance industry turmoil to contribute to persistently elevated core services inflation also helps to inform our short duration position in the portfolio.
“State Farm and Allstate Exit California;” “Farmers becomes latest company pulling out of Florida;” “In Louisiana, more than 20 companies have shut down or left the state.” Newspaper headlines like these have appeared with disconcerting regularity in 2023. They call to mind the last large disruption to the US property & casualty insurance market, which occurred in the 1980s and hit the cover of Time Magazine. The 1980s insurance cycle contributed to very elevated core services inflation that concerned policymakers throughout the decade.1 We view the current confluence of challenges for the insurance industry as sufficiently large to pose similar upside risks to core services inflation and also worry about the potential impact on future government bond issuance needs.
Building challenges for insurers
In 2020, many insurers cut policy premiums in response to soaring profitability and political pressure to ease consumers’ burdens. Those lower premiums were invested into bond-heave securities portfolios at rock bottom interest rates that have since soured. That left the insurance industry vulnerable to the post-pandemic challenges of global supply chain shortages, rising physical asset valuations, higher rebuilding costs, more catastrophes, and rising reinsurance premiums. The result was that 2022 was an exceptionally bad year for insurers – industry-wide profits from the previous four years were unwound and it was the least profitable year for auto underwriting in 25 years.2
In response, the insurers have looked to regain financial footing by hiking premiums across all lines of businesses, but particularly auto and homeowner rates. Premiums are set to rise at the fastest pace since 2002 – and those estimates don’t even include large upside risks for homeowner policy premiums in California announced in September.3 If this cycle follows the multi-year dynamics of most insurance underwriting cycles, we should expect premiums to continue rising at elevated rates for the next few years until the profitability of the sector is regained. These premium rises will transmit through the economy and elevate upside risks to consumer prices.