Insurance Industry In Critical Danger

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Key Takeaways

  • Property insurers have yet to adjust premiums to higher inflation
  • Ida damages could climb to $20 billion
  • Extreme weather-related disasters are becoming more frequent and costlier.
  • All insurers face investment risk with corporate debt and treasury holdings

Insurance industries are in deep trouble.

Inflation costs are rising faster than premiums.

Their fixed-income investments look like they’re about to take a hit in the coming months.

And that’s just the beginning.

Rising Costs

One of our staff shared a story that sums up inflation perfectly.

A freak hailstorm in the spring forced him to get his roof replaced through his insurance company.

You would think roofing contractors would line up to take the job, especially since there were 20 other houses in that same neighborhood.

You would have been wrong.

Luckily, he had a friend who was in the business.

After an initial estimate, the roofing tiles he selected were on a six-week backlog from China, which turned out to be closer to eight weeks.

With the roof repairs finally underway, the workers found more excess lumber rot than expected.

Tack on another $2,000.

In fact, by the time his insurance company got the final bill, the total rose from $25,000 to over $45,000.

Material costs had skyrocketed 50%.

Labor costs were up 25%.

The contractor wasn’t even trying to make a massive profit. Prices were just that high.

Unsurprisingly, the insurance company balked but eventually caved.

It should be obvious, but insurance companies that cover structural damage are in deep trouble.

With inflation skyrocketing, premiums have yet to catch up.

And when we get those adjustments later this year, consumers could be in for some eye-popping surprises.

Climate Change Risk

Ida is the most recent of a long, ever growing list of climate catastrophes. Larger and more densely populated areas are leading to enormous economic consequences and lives lost.

At the moment, current estimates put insurer losses upwards of $20 billion for Ida. That still pales in comparison to Katrina’s $65 billion damage 15 years ago.

22 extreme weather events caused a collective $95 billion in damages in 2020 alone.

In the last several decades, we’ve seen a steady increase in the number and magnitude of these instances.

Souring Investments

Most insurance companies don’t just sit on the cash they receive. They invest it in conservative liquid assets.

High-quality corporate debt and Treasuries are staples for the industry.

That works great when they’re able to buy them on the cheap. 

But with debt market prices at multi-year highs, their holdings not only pay minimal dividends but carry enormous downside principal risk.

The Bottom Line: Property insurance companies will pass on costs to customers in the form of higher premiums. In the meantime, all insurers face potential profit erosion if and when debt prices fall.

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