I, like many of you, began to feel the economic tides shifting a few months ago, whether it was the rise of gas prices or the trip to the grocery that rang up to a little more than usual. The general feeling was that we were entering into a new normal.
Interestingly, what is happening is not new. Rather, this "book" will likely read like another classic from the ’70s and ’80s titled, “how did this happen, and how do we get out of it?” Just ask Jimmy Carter. Although inflation was routinely blamed on oil prices, currency speculation, greedy business and union bosses, the truth came out after the crisis was over. Guess what the primary influence of inflation was: monetary policies that financed massive budget deficits. The U.S. funded an expensive war in Vietnam and attempted to steer monetary policy to achieve employment goals, and investors became nervous about the value of the dollar in relation to our deep deficits. Sound familiar? You could replace those headlines with: The U.S. funded an expensive war against a pandemic and attempted to manipulate monetary policy to float the economy during that time with quantitative easing, and investors became nervous about a changing geopolitical landscape.
If the current trends mirror the past, we will likely see core inflation and interest rates continue to rise. The era of cheap money will officially be over, and economic growth will stagnate. I used to think cheap money references were attributed to big banks and high-wealth individuals. Interestingly, due to the explosive growth in home values, this trickle-down effect of monetary policy helped home equity to grow a staggering $9.4 trillion, which then triggered a massive refinance effort unlocking $70 billion into the market with cheap interest rates. The quantitative easing efforts grew the Federal Reserve ownership of mortgage-backed securities from $1.4 trillion to $2.7 trillion in a little more than a year. This unlocked cheap money and helped to spur economic growth. The party is coming to an end.
What happens now? You can see what will happen, like a slow-moving train wreck. This cheap capital will eventually dry up, inflation may mitigate but remain elevated and economic growth will slow. The term "stagflation" is now in vogue.
Will we recover? Sure. No doubt. Just as the story from the ‘70s and ‘80s taught us, cooler heads will prevail, and we will come out the other end, but it will take some time.
What does this mean for insurance companies?
- The economy is opening post-COVID, and this will not slow. People are not going back into isolation. Therefore, the concerns of elevated frequency over prior years will continue. The impact of catastrophes will also continue to be elevated.
- Supply chain issues will drive prices upward. The best indexes to watch will be the core CPI for general trends but the PPI for a more exact view of construction costs, which have almost doubled since May 2020.
- Employment cost indexes are beginning to tick upward as a trailing indication that inflationary pressures will only continue to see pressure for the long term.
See also: Insurance Technology Trends for 2022
What can an insurance company do about this?
- Get out and see the impact first-hand. First and foremost if you are an insurance CEO, you should have already completed a round of field rides with your front-line claims adjusters observing estimates being developed. If you are waiting for your actuary team to pick up on this, you will be waiting too long and will miss out on insights.
- Customer shopping will pick up. You need to communicate with your customers about their insurance coverages, alternatives and the value you bring.
- Communicating is fine; developing solutions is better. The average American pays 14% of their income on insurance annually. (Please do not ask me to raise my deductible again. There has to be a better way.) Your product team must be as focused on alternatives as they are on developing rates and underwriting guidelines.
There has never been a better time to challenge our conventional thinking. Will consumers view the insurance industry as a dynamic, solution-driven partner in their life or as a static, same-as-always industry? If we have been prudent with our risk management efforts, then we should take this time to respond to our customers' needs. I continue to recommend that incumbent and insurtech companies work together to spur innovation.
Ultimately, we have a chance to break through and change the narrative from, I have to buy insurance, to, I am excited to transfer the risk in my life during these uncertain times.
As Einstein said, “We cannot solve our problems with the same thinking we used when we created them.”