Why is Inflation Rising?
U.S. inflation rose to 8.5% in March the highest since December 1981 – and up from February’s 7.9% annual rate. Rising prices are resulting from pandemic-related supply chain issues, expansionary monetary policy, the Russia-Ukraine conflict, high oil prices, and a tight labor market. Analysts see inflation remaining far above the Federal Reserve’s (Fed) target level of around 2% for some time which could lead to potential challenges for Property & Casualty (P&C) brokers.
The Federal Reserve signals more rate hikes to combat inflation in a slowing economic environment.
Due to the ongoing surge in inflation, economists project that the Fed would announce two half-point rate hikes at the next meetings in May and June. This would move the fed funds rate to 1.25% – 1.5% after the June meeting.
Impact of Inflation Rates Rising
While U.S. GDP grew at a solid 5.7% in 2021, analysts are projecting slower economic growth this year with 2022 GDP growth projected to increase by 3.7%. Many analysts see the Fed aiming for a balance of maintaining growth while taming inflation with its policies. In meeting minutes released on April 6, officials were inclined to a larger half-point increase at the March meeting but saw a smaller increase as suitable because of the “greater near-term uncertainty associated with Russia’s invasion of Ukraine.”
Additionally, the bond market saw its worst quarterly performance for the period ended March 31, 2022, since 1980, according to the Bloomberg U.S. Aggregate Bond Index. On April 11, the yield on the benchmark 10-year note increased to 2.79%, the highest level since January 2019.
Effects of Inflation on Insurance Brokers
Here’s how rising inflation and potential slower growth could impact insurance brokers.
- While interest rates are increasing with more aggressive Fed action, borrowing costs are likely to stay at manageable levels in the near-term. Rates could increase over the longer-term in 2023 impacting borrowing costs of private equity investors who are looking to acquire large insurance brokers. This may prompt a re-evaluation of pricing levels.
- Insurance rates would likely remain firm in an inflationary environment as carriers anticipate the increase of future claims costs. Certain insurance lines, such as Cyber, Umbrella and Wind-exposed property are seeing particularly strong rate increases. In March 2022, public brokers reported continued insurance rate increases through 4Q2021, with several of them anticipating rates to remain firm in 2022. On Arthur J. Gallagher & Co.’s (NYSE: AJG) 4Q2021 earnings call, CEO J. Patrick Gallagher commented: “I see difficult P&C market conditions continuing throughout 2022. That’s because our risk-bearing partners remain cautious on rising loss costs.”
- Commission income for brokers will likely remain robust due to increased exposures coming out of the COVID-19 downturn in addition to inflation driven premium increases. “Inflation in general would be a bit of a tailwind for us because when we look at past cycles, Marsh & McLennan & Companies, Inc. (NYSE: MMC) tends to do a bit better in inflationary periods than what preceded them, so…probably a mild benefit because of exposure unit growth, principally,” commented CEO Dan Glaser on MMC’s 4Q2021 earnings call.
- Wage inflation could continue to increase in a particularly tight job market. Low levels of unemployment, and the Great Resignation, are contributing to challenges of filling new and existing positions.
- Increasing expenses could pressure margins but some brokers are making changes to offset higher costs. Willis Towers Watson Public Limited Company’s (NYSE: WTW) CEO Carl Hess said on the company’s 4Q2021 earnings call, they are taking measures to manage expenses: “One of the pillars of our program is capitalizing our scale to move back-office work to centers of excellence that we think will improve client and colleague experience and outcomes but should also allow for relief on the cost pressures that we might have in an inflationary market.”
How to Deal with Rising Inflation
Overall, there are evolving macroeconomic issues facing brokerage companies in 2022, but inflation could actually serve as a mild tailwind for some as inflation may keep rates elevated and boost premiums.
If you have questions about Today’s ViewPoint, or would like to learn more about how MarshBerry can help your firm plan for its future, please email or call Gerard Vecchio, Managing Director, at 212.972.4886.
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