Historical and Potential Impacts of Deflation on the P/C Industry

The September 2010 I.I.I. Inflation Watch spreadsheet, containing the latest data from the U.S. Department of Labor’s Bureau of Labor Statistics (BLS), reports that the CPI was 1.1 percent higher in August 2010 than in August 2009. The "core" rate (all items less food and energy) for the twelve months ending August 2010 remained at 0.9 percent. Some economists say that the economy is close to deflation—defined as a prolonged state of broadly declining prices. Although this benefits consumers, it isn't good for economic growth (for one thing, it induces consumers and businesses to postpone spending in hopes of buying later at lower prices). BLS reports that August-to-August auto insurance prices rose 5.1 percent. The seasonally adjusted monthly breakdown shows that auto insurance prices rose in every one of the last 12 months, (unlike the CPI, which dropped in April, May, and June). The I.I.I. Inflation Watch spreadsheet shows that these increases are fed by increases in the components of claims—mainly increases in the cost of medical care, especially hospital-based care (outpatient care up 5.0 percent inpatient care up 7.7 percent in the past twelve months)—for injured drivers and others. The cost of Hospital Services affects not only claims for personal auto insurance (liability, med pay, and no-fault) and bodily injury paid under homeowners liability coverage, but also various commercial liability lines and workers comp insurance as well. BLS publishes a price index for tenant’s (but not homeowners) insurance. The I.I.I. spreadsheet shows a twelve-month rise of 3.8 percent in tenants insurance. If this increase also applied to coverage on the building, it would be driven largely, presumably, by increases in the cost of residential construction (measured in the Producer Price Index) of 3.1 percent in the 12 months ending August 2010.