The annual inflation rate was 8.6% from May 2021 to 2022, according to the US Bureau of Labor Statistics. This represents the largest annual increase in more than four decades.
The biggest interest rate change in four decades is a “big deal”, for insurance and the wider economy, according to Amwins Chief Underwriting Officer Mark Bernacki (pictured).
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“With current inflation above 8% and getting quite hot, there is an absolute need to really slow the economy down by curbing some of the demand,” Bernacki said.
“Obviously, this is expected to cause short-term difficulties, both for the economy and for the insurance sector, but in the long term, it should ultimately be good for the economy and the insurance sector. insurance and also strengthen labor markets which we see.
Insurance agents should talk to customers, Bernacki said, to make sure they have “sufficient insurance” amid rising loss costs as the Fed seeks to mitigate the effects of the inflation.
They should also educate them on what the change in interest rates means for the insurance market.
“It’s a good thing for the insurance industry and ultimately a good thing that [for clients] should lead to the difficult market that we have faced for a number of years to stabilize and eventually soften, making insurance easier and more available and more profitable,” Bernacki said.
From a longer to mid-term perspective, carriers in particular stand to benefit, given that they are likely to sit on large balance sheets comprised primarily of fixed-income assets.
“Any increase in interest rates, even nominal – and I wouldn’t call 75 basis points nominal – is ultimately good for their business because it generates much higher investment returns, which should increase their profitability,” Bernacki said.
Historically, rising interest rates have generally heralded easing market conditions. However, there are still dynamics at play that push in the opposite direction.
There is still upward pressure on what Bernacki said is an “undervalued market,” while the interest rate environment also remains relatively low compared to previous decades.
From a first-party, or more ownership-focused, perspective, there’s a “direct correlation” between rising prices and rising loss costs, Bernacki said. This means that the increase should have positive effects for this type of business.
As the market operates in what Bernacki described as an “undervalued situation”, the underwriting boss said he “[brings the] the emphasis that both carriers, as well as brokers and customers, should place on proper assessment [under scrutiny].”
For third-party carriers, who can stay longer on premium income, there should be a “very beneficial effect” as they are able to benefit more from the return on investment, Bernacki said.
Life insurance carriers could be first in line to benefit from rising interest rates, experts told Insurance Business as they forecast a surge in investment capital and manager interest assets for the takeover of life insurance companies.
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The Federal Reserve is torn between balancing the economy and taking so many corrective measures that the United States is being dragged into a recession.
“Frankly, I don’t think he had a choice. [but to increase the rate]”, Bernacki said.
Asked if he feared a potential return to a situation in 2008 – when the United States entered its deepest recession since World War II amid a global financial crisis and the bursting of the bubble real estate, with insurance giant AIG among companies bailed out after being deemed “too big to fail” – Bernacki said, from his perspective, “those fears continue to linger”.
However, he said he was not as worried as before, with the stock market having already entered bearish territory and financial services companies – including carriers – working in a “better” environment for monitoring and regulatory control.
“I’m afraid we’re very close, if not plunging into a recession before things get more positive, from an economic perspective, and we see continued growth in the labor market – even with those fears expressed, I’m still fully supportive of Fed action,” Bernacki said.
As for what might happen if a recession does occur, it could be a case of short-term pain with longer-term gains for the industry.
“If companies do less, they would need less insurance, time element values could potentially go down, which could lead to a downturn in the industry,” Bernacki said.
“What comes out of this, from a medium to long term perspective, should be a stronger economy, a stronger labor market. And [that should]ultimately benefit P&C. »