Rising car insurance premiums have been a significant driver of inflation over the past few months. Bank of America Securities economist Stephen Juneau pointed out in a recent report that motor vehicle insurance increased by 22.6% annually in April, the largest increase since 1979.
“This has been a growing driver of inflationary stickiness in core CPI, which remained high at 3.6% year-on-year in April,” he wrote. While rising motor vehicle insurance costs are not a recent trend, they are Played a larger role in driving up the Consumer Price Index (CPI) for core services, which exclude rents and landlord equivalent rents (also known as super core services).
Super core services CPI increased by 4.9% year-on-year, with motor insurance contributing 2.3 percentage points and all other components contributing 2.6 percentage points.
“Significant increases in motor vehicle insurance premiums are a response to the industry’s underwriting losses,” Junod said. Factors contributing to these losses include rising vehicle prices (new and used), increased technology and labor repair costs, and changes in driving patterns The return to normal has resulted in an increase in the number of accidents.
Recall that even as Americans drove less as they worked remotely and halted most leisure travel during the worst of the pandemic, supply chain disruptions caused by COVID-19 caused car prices to soar.
The good news is that motor vehicle insurance rate growth appears to be slowing. “There are signs that many insurance companies are returning to profitability,” Junod said. “Additionally, car prices have given back some of their previous gains and industry wage growth has cooled. That doesn’t mean your premiums will go down, but we think growth should slow.”
The Fed’s next major measure of inflation is personal consumption expenditures in Friday’s personal income and spending report. Within this indicator, motor vehicle insurance grew modestly, partly explaining the gap between CPI and the super core services inflation data in PCE inflation – CPI was +4.8% in March compared to +3.5% for PCE. However, both are significantly higher than the pre-pandemic rate of 2.0%.
“We believe further improvement in this aggregate is one of the keys for the Fed to become more confident in the deflationary process and begin a rate cutting cycle. Until then, we expect the Fed to keep rates on hold,” Bank of America’s Juno wrote.
Excluding the more volatile food and energy categories, core PCE is expected to rise 2.8% annually in April, the same rate as March, according to TD Economics.
As premiums rise, so do the stocks of property and casualty insurance companies. Over the past year, Allstate (NYSE: All) shares rose 41%, Geico parent company Berkshire Hathaway (NYSE:BRK.B) (NYSE:BRK.A) rose 25%, both exceeding the S&P 500’s 27% gain during the same period. Traveler (NYSE:TRV), at the same time, rose 18%.
In the property and casualty insurance space, SA Stock Screener rates 7 stocks as Strong Buys, with Allstate (ALL) at the top of the list.
