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In Q1, price increases in financial services and insurance pushed personal consumption expenditures (PCE) in this category up by 4.6% QoQ – the steepest rise in almost a quarter of a century. PCE prices as a whole only gained 3.4%. Upon recording their latest gain in April, auto insurance premiums have now risen throughout a period 28 consecutive months. Though the seasonally adjusted MoM gain in the consumer price index (CPI) was gauged at just 0.3% last month, the motor vehicle insurance index within the CPI rose by a much hotter 1.8%. Though that slowed MoM from a 2.6% gain in March, the YoY gain accelerated to 22.6% versus 22.2% in the prior period.
These sort of price hikes on insurance have not seen since the 1970s. Premiums are on the rise as insurers face an ongoing uptick in risks facing their policies. More car accidents are being caused by distracted drivers looking at phones, auto theft is becoming more common, and the costs associated with repairing damaged vehicles are inflating the bills insurers are obliged to cover. For every $100 in premiums taken in, car insurers paid out $104.90 in 2023. That was an improvement from the prior year, but a signal that premiums may need to rise further to justify the policies insurers are underwriting.
When it comes to homes, US insurers lost money on homeowners coverage in 18 states throughout 2023, more than a third of the country, according to a New York Times analysis. That’s up from 12 states five years ago, and eight states in 2013. Insured losses from severe thunderstorms alone — characterized by sudden heavy rains, high wind speeds, as well as hail and flash floods — hit $50 billion in the US last year. That is not an isolated phenomenon, as a record tally of insured losses from natural catastrophes was racked up globally in 2023. Per Swiss Re Group, these losses exceeded $100 billion for a fourth consecutive year. That figure could double over the next decade, as the reinsurance company warns rising temperatures could make extreme weather events more frequent and intense.
Insurers are also facing heightened legal bills in the US, as potential abuse of the legal system has spurred a rise in increasingly costly lawsuits. Increased legal costs are generally referred to as “social inflation” and Bloomberg reports that this came up on insurers’ earnings calls more than 550 times between 2020 to 2023, compared with fewer than 80 in the previous four-year period.
Even prior to this latest wave of premium hikes, the cost of property and casualty insurance has long grown particularly quickly among Americans’ household expenditures. In two decades of data between 2001 to 2021, the Insurance Research Council (IRC) finds a 5% annualized rise in the cost of homeowners insurance doubling up a 2.5% annualized increase in household income over the same period. Separate data from Realtor.com shows US home insurance costs jumped by 33.8% in the period between 2018 to 2023. Insurance providers likely exhibit strong pricing power as their product is a legal or contractual necessity in many cases, but quickly rising rates could potentially increase competition between insurers as inflation-slammed home and auto owners become more active in trying to find lower insurance rates.
Some do not see a this as a likely outcome and are betting big on continued outperformance among insurers. For instance, Berkshire Hathaway just disclosed that they’d been building a massive $6.7 billion stake in property-casualty insurer Chubb since the second half of last year. The position has become the conglomerate’s ninth-largest but was a “mystery holding” until yesterday. Berkshire’s total cost basis for “banks, insurance, and finance” equity holdings jumped by $1.4 billion in the first quarter after an increase of $3.59 billion in the second half of last year, largely reflecting the new Chubb stake.
Investors can gain exposure to insurance via the iShares U.S. Insurance ETF (IAK), as well as the SPDR S&P Insurance ETF (KIE). Both of these funds have outperformed the Financial Select Sector SPDR Fund (XLF), a broader gauge of the financial sector equities, throughout the year-to-date period.
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