As we head into earnings next week, the direction of loss-cost inflation and pricing remains front and center. The most recent CIAB data, covering Q3, noted that pricing in commercial property has slowed, but that improvements for long tail and casualty lines are likely.
We can use several data points from recent consumer and producer price index data as proxies for loss-cost inflation. On the consumer side, medical services costs can serve as useful indicators for the direction of long-tailed liability lines. On the producer side, the cost of construction and repair materials can be useful information for lines like commercial property and homeowners.
Loss costs have been of particular concern lately, primarily on the liability side, due to the uncertain impacts of social and medical inflation. Catastrophes such as the Los Angeles wildfires and the 2024 hurricane season have added to the pressure on commercial and personal property lines as well.
Last month’s Federal Open Market Committee (FOMC) meeting indicated there will be fewer rate cuts than previously anticipated in 2025 due to CPI inflation remaining above the Fed’s target of 2%. Additionally, the members of the FOMC seemed concerned about the inflationary potential of the incoming political administration’s fiscal policies.
The December 2024 CPI and PPI reports seem to have confirmed some of the FOMC’s fears, as both indices showed slightly higher rates of inflation than they did in November.
In this note, we’ve examined trends for inflation items relating to liability and commercial property lines to better understand the potential direction of loss costs in 2025.
Our analysis leads us to believe that the uptick in overall inflation and medical inflation in recent months implies that insurers should continue to monitor the need for rate change coming off of double-digit inflation peaks from early 2024.
On the other hand, the producer price index for construction materials shows a recent sharp decline into the single digits from double digits. The impact of wildfire could cause demand surge that drives the cost of construction and property repair back up, but the skew of fire losses towards personal lines means commercial rate changes are unlikely.
We discuss these in detail below.
Medical prices have coalesced after huge divergence
Indicators for health services inflation – comprising physician’s care, hospital services, and medical care services – remained below the CPI inflation rate during the peak period between 2021 and 2023.
As inflation came under control, physicians and medical care inflation both fell substantially alongside it. The cost of hospital services, however, skyrocketed by 9.4% in June 2023 and remained elevated for much of 2024.
By December, all three of these items gathered to a ballpark closer to the overall inflation rate of 2.9%.
Though medical inflation remains manageable for now, the takeaway here is that liability lines could see adverse impacts if the price of medical care and physician’s services continues to rise. The spike in hospital services inflation seen between 2023 and 2024 could be seen in long-tailed lines as claims from those accident years are paid out.
Commercial property rates, per CIAB, remained above construction inflation as of Q3
Moving to commercial property, the producer price index (PPI) for construction materials has mostly stagnated from 2022 onwards following the major inflation spike in 2021. Having advanced since 2018, commercial property pricing re-accelerated and surged through 2023 owing to elevated cats and increased reinsurance costs, and has since tapered down.
CIAB had rates rising robustly still through Q3, although some other indices including Amwins and sources suggest pricing has now dropped into negative territory.
The catastrophic damage seen in Los Angeles due to the past few weeks’ wildfires is also unlikely to drive up commercial property pricing outside California. Losses are estimated to skew 80:20 towards personal lines, meaning that the impact on the broader commercial property market which was heading towards softening off a very high base could be muted.
Nonetheless, the amount of construction materials needed to rebuild huge swathes of some of the world’s most expensive real estate will certainly create a surge in demand for those materials. While commercial lines were not as affected in this disaster, rising construction material price inflation could raise loss costs in other events down the line.