From financial economists’ exuberant growth forecasts early in the year to central bankers’ coining of the term “transitory” inflation to pushback against Federal Reserve “tapering”, credible economists have never diverged so widely in their economic outlooks as they have in 2021, says Dr. Michel Léonard, head of Triple-I’s Economics & Analytics department.
Léonard is author of Triple-I’s fourth-quarter insurance economic outlook report, Soft Landing, Headwinds and Rebound. The quarterly report is available to Triple-I members only at economics.iii.org and is a companion publication to Triple-I’s Insurance Economics Dashboard. Non-members interested in learning about membership can contact Deena Snell.
Triple-I’s analysis translates broad economic growth drivers into business line-specific terms. So, while the insurance industry is expected to show a 3.4 percent growth rate in 2021, Léonard says, it will underperform overall U.S. GDP growth of 5.8 percent because it is “constrained by its ties to industries with growth rates significantly below and inflation rates significantly above the U.S. rates overall.”
According to the report, concerns about “runaway inflation” subsided in the second half of 2021 as prices for most goods in the consumer supply index (CPI) trended lower and overall inflation peaked at 4 percent. However, for a basket of goods whose prices tend to affect insurance claims and losses – think automobiles and replacement parts, among others – inflation remained above 10 percent. This is due primarily to supply-chain and labor-force disruptions.
As a result, the Triple-I report sees the insurance industry’s combined ratio increasing (underwriting profitability falling) due to low underlying growth and high line-specific inflation. It also sees the industry’s 2021 investment returns outpacing 2020’s, despite headwinds.