According to re/insurance broker Aon, the US appears to be nearing, or past peak inflation, with broad inflation still close to a 40-year high of 8.5%, though down from last month’s 9.1% reading.
Falling energy prices primarily drove the decrease, says Aon, with building materials and used vehicle prices also seeing lower inflation than in previous months.
Building materials inflation has outpaced broad inflation measures but price increases appear to be slowing, notes the report, with inflation on goods and services related to property insurance up 10-20% over the past year, having outpaced the CPI.
Aon’s property cost index, which combines goods and labour prices, shows a 10% increase in YoY inflation, though the pace has declined recently.
It is expected to moderate over the next two years to levels higher than pre-COVID, but less than was seen in 2021 and 2022.
Building material prices levelled off over the second half of 2021, suggests Aon, with supply chain disruption easing, and shipping costs beginning to recede.
Additionally, the Federal Reserve is aggressively raising interest rates and is expected to raise rates from the current 1.50% to ~3.5% by the end of the year.
The Federal Reserve expects broad inflation to be ~5% in 2022 and Wall Street is indicating an inflation rate of ~2-3% over the next 5 years. Bloomberg’s consensus forecast is for broad inflation to be ~5% by the end of the first quarter of 2023.
A multi-step trending method is appropriate for pricing, suggests the report, as COVID-induced spending patterns and behaviours were not present before 2020, and may not persist long beyond the pandemic.
Aon adds that there are strategies re/insurers can use to help combat inflation.
Specifically, the report notes that “Ensuring insured values are correct is the most important and impactful action a (re)insurer can take. Insurers with an appropriate inflation guard in their policies likely already reflect the current inflation and care should be taken to avoid double counting.”
“Rate increases can be used to make up the difference between actual values and adjusted values. The same rate on an increased limit is okay so long as the limit reflects the actual values. Pricing and reserving models must account for recent inflationary trends but not double-count. Reinsurance can also offer an additional layer of protection.”
