Triple-I Outlook: Insurance Economic Drivers Could Outperform U.S. Economy By 2025 But Major Hurdles Remain

For immediate release
New York Press Office, Michael Barry, 917-923-8245, michaelb@iii.org

NEW YORK, Oct. 18, 2023—The economic drivers of the U.S. property/casualty (P/C) insurance industry could cumulatively expand faster than the nation’s gross domestic product (GDP) in 2024 and may outperform the overall U.S. economy by 2025, according to the Insurance Information Institute’s (Triple-I) latest Insurance Economics Outlook.

“Growth drivers specific to P/C performance have been improving faster in 2023 than the rest of the U.S. economy, after underperforming the wider economy three years in a row,” writes Michel Léonard, Ph.D., CBE, chief economist and data scientist, Triple-I, in the organization’s Q4 2023 Outlook. “We forecast P/C growth of 2.1 percent in 2023, slightly above our earlier expectation of 1.9 percent. This confirms our expectation from January 2023 that the gap between P/C and overall growth would continue to narrow this year. P/C underlying economic growth should continue to improve over the next three years, potentially outperforming the wider economy by 2025.”

The underlying economic growth of P/C insurers, who write and sell auto, home, and business insurance, is impacted by replacement costs (e.g., the prices of construction materials, auto parts), consumer and corporate spending, interest rates, and U.S. employment trends, among other variables. The Federal Reserve is projecting the U.S. GDP will grow 1.5 percent in 2024 and 1.8 percent in 2025.

Between 2020 to 2023, P/C replacement costs increased an average of 45 percent whereas inflation for the overall U.S. economy increased 15 percent within that same timeframe. Increases in P/C replacement costs should continue to slow down faster than overall inflation over the next three years, Triple-I projects. However, it will take 10 years of normal inflation for insurance replacement costs to process pandemic-related increases, the Outlook states. Normal inflation is defined as 2 percent per year.

The speed and scale of inflation’s decrease validates the Federal Reserve’s hawkish monetary policies, states Insurance Economics Outlook, Q4 2023, a Triple-I members-only publication. But the Federal Reserve’s inflation reduction remedies, the Outlook says, did not match the cause of higher prices, which stemmed in large part from the supply chain disruptions which are now easing in the pandemic’s aftermath.

“The U.S economy remains strong regardless of the Federal Reserve’s monetary tightening which we continue to see as excessive,” the Outlook states. Triple-I’s analysis envisions consumer and corporate spending could pick up in the second half of 2024, depending on the Federal Reserve’s actions, as Americans wait for lower interest rates to finance auto and home purchases and renovations.  

The Federal Reserve raised interest rates in July 2023 from 5.25 percent to 5.5 percent and kept them unchanged in September 2023. Two more interest rate increases are expected between now and March 2024, most Wall Street analysts anticipate, the Outlook says. However, Léonard points out, a little noticed change by the Fed to its policy expectations may indicate that rates will continue to increase until 2025.

Triple-I expects the U.S. unemployment rate to end 2024 at 3.9 percent, below the Federal Reserve’s 2024 forecast of 4.1 percent. Regardless of low unemployment and improving economic fundamentals, public sentiment about the economy remains negative, the Triple-I Insurance Economics Outlook notes. This perception is largely driven by real wages increasing by less than 1 percent between 2020 and 2023. Without above-average pandemic inflation, real wages would have increased by 13 percent.

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Video:  Dr. Léonard Discusses Triple-I’s Insurance Economics Outlook Q4 2023