Triple-I predicts increase in US P&C replacement costs

Triple-I predicts increase in US P&C replacement costs | Insurance Business America

Insurance News

Triple-I predicts increase in US P&C replacement costs

Analysts note a trend that could impact the industry

Insurance News

By
Jonalyn Cueto

A report from Insurance Information Institute (Triple-I) shows that the growth of replacement costs for US property & casualty (P&C) insurance has slowed, falling behind overall inflation. At the same time, however, it predicts that this trend is likely to reverse, with P&C replacement costs expected to grow faster than overall inflation by 2026.

According to Triple-I’s latest Insurance Economics Outlook, replacement costs for P&C insurance grew by 1.5% in the first half of 2024, which is significantly lower than the overall inflation rate of 3.5%. This dip in replacement cost growth could offer some short-term relief to insurers, as the outlook suggests that pressures from rising replacement costs will intensify within the next two years, likely leading to increases in insurance premiums.

The Triple-I study points out that while the Consumer Price Index (CPI) has dropped by 4.1% year-over-year, it has shown a slight upward trend since the beginning of 2024. This uptick in inflation from 3.1% in January to 3.5% in March does not, however, provide a clear indication of future trends, given similar fluctuations throughout 2023, Triple-I noted.

Triple-I’s chief economist and data scientist Michel Léonard, PhD, CBE, noted that the CPI changes and the fluctuating nature of replacement costs could affect the outlook for P&C insurance in the coming years. “We expect P&C replacement costs to increase by 1.5% in 2024 and 2.5% in 2025, below overall inflation in both years, and increase by 3.2% in 2026,” he said.

A dim outlook

The expected increase in P&C replacement costs can be attributed to various factors, including the previous spike in construction materials and labor costs, which rose 55% between 2019 and 2022. This increase was nearly four times higher than the CPI over the same period.

While the current slowdown may seem like good news for insurers and policyholders, geopolitical risks, such as ongoing tensions in regions like Russia-Ukraine and China-Taiwan, could drive up inflation, affecting supply chains, global food prices, and trade relations. Triple-I noted these factors could contribute to renewed inflation pressures, ultimately impacting replacement costs and insurance premiums.

Triple-I forecasts that US inflation will remain relatively flat for the remainder of 2024, hovering around 3.5%. However, with P&C replacement costs predicted to rise above inflation by 2026, insurers and policyholders alike should be prepared for potential shifts in the insurance landscape.

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