Russia’s invasion of Ukraine since February 24, combined with persistent supply chain disruptions related to the pandemic, continues to drive inflation measured by the consumer price index (CPI). From a non-life / accident insurance perspective, these forces have a particularly strong impact on compensation costs ̵1; especially in the automotive sector.
Total P / C compensation costs represent a weighted average for homeowners, personal and commercial cars, commercial multi-risks, general liability and compensation lines for workers. Replacement costs for cars include new and used vehicles, as well as parts and labor for construction and repair.
Based on the March publication of CPI data from the Bureau of Labor Statistics, total P / C replacement costs rose to 16.3 percent in February – up 4.6 percent from 11.8 percent in December. That increase is 3.3 percent larger than Triple-I estimated in December, before the invasion began.
While CPI growth is largely driven by rising petrol prices stemming from business uncertainty in Eastern Europe, the main driver of compensation costs is the industry’s exposure to car prices. Price increases for new vehicles broke only in double digits during the fourth quarter of last year; however, price inflation for used vehicles has been above 25 per cent in nine of the last 12 months.
“Although fuel imports from Ukraine and Russia represent only a single-digit percentage of U.S. energy consumption, gasoline prices are likely to remain high as speculation over OPEC exports, alternative fuel sources for Central Europe, long-term profitability of domestic drilling operations, and increasing food insecurity. “Countries in the Middle East are continuing,” said Dr. Michel Léonard, Triple-I’s chief economist and computer scientist and head of its economics and analysis department. “
Russian exports of these metals – critical for vehicle construction – account for 15 percent and 20 percent of the global market, respectively.
Dramatic increases in the prices of used vehicles are common during and after economic corrections and recessions, said Léonard, adding that these increased prices usually resolve within 24 months after the end of the downturn. Provided that the situation in the supply chain improves and the US economy does not fall back into recession, price growth for used vehicles is likely to fall back in line with inflation for new vehicles over the next 12 months.