U.S. Macroeconomic Indicators Vol III, Issue 2

Market Trends and Current Statistics 

Key U.S. macroeconomic indicators that are likely to impact brokerages within the insurance industry.

Specialty Insurance and E&S Lines Show Continued Strength in Q1 2024 as Premiums Soar 

Premium placed in the delegated authority and Excess and Surplus lines (E&S) marketplace (MarshBerry’s classification of specialty insurance) continues to experience strong momentum and doesn’t appear to be slowing down, with reports of robust premium growth and pricing increases. Drivers of this expansion include the current elongated hardening cycle (over five years long), movement of premium from admitted to the E&S markets, and product developments (such as Cyber and Cannabis insurance). Increased catastrophe events, social inflation, nuclear verdicts, and higher claims costs have also driven weaker underwriting results for carriers, contributing to the elongated firm rate cycle.

Specialty premiums are growing as a percent of the total Property & Casualty (P&C) market. This segment is no longer an afterthought, and the growth is projected to continue. Brokerages that have a well-defined, strategic specialty strategy can take greater advantage of these shifts in the industry. 

Strong Premium Growth In 2024 Is Expected to Continue

MarshBerry estimates specialty distributors (those with delegated authority or act as intermediaries between that of retail brokers and risk-taking markets) accounted for about $180 billion of premium written in 2023. Specialty premium as a percentage of the overall P&C market nearly doubled over the last decade, increasing from approximately 9.5% in 2013 to an estimated 19% in 2023.¹ This trend is expected to continue. 

According to data from the Wholesale & Specialty Insurance Association’s (WSIA) 15 state surplus lines office report, 2023 premiums hit nearly $73 billion in 2023, a 14.6% increase compared to the record-breaking $63 billion seen in 2022. Commercial property premiums increased by 32% to $24.2 billion in 2023, while commercial liability increased by about 10% to $26.8 billion in the same period. For the surplus lines premiums in California, Florida and Texas, the rate of increase for E&S quarterly premiums has begun to slow from 2022’s peaks. However, premiums have continued to rise at a double-digit rate. For Q1 2024, premiums in California are up 4%, Florida is up 27%, and Texas is up 18% — all compared to the last twelve months (LTM).

Ryan Specialty Holdings, Inc. (RYAN) Chairman & CEO Patrick G. Ryan spoke of secular growth drivers in the E&S space, stating: “We believe the E&S market will keep growing and consistently outpace growth in the admitted market, overshadowing any cyclical shifts in certain lines with respect to submission flow and pricing. This is further aided by changes in distribution trends, with a growing number of wholesale-only E&S carriers in the marketplace.”

On P&C insurer W.R. Berkley Corporation’s Q1 2024 earnings call, the company noted that while E&Sis still strong, momentum within the property line is not what it was last year. CEO W. Robert Berkley, Jr. said W.R. Berkley continued to see “very robust activity on the E&S front, particularly on casualty or liability” in Q1 2024. He also added that there’s “nothing that leads me to believe the momentum is going to be subsiding anytime soon.”

Brokers Can Benefit From Having a Strategic Specialty Strategy 

As growth trends in the market continue to favor premium moving into E&S, brokers who have a specialty strategy will benefit. The strategy may include strategic talent acquisition and technology investments that enable brokers to interact with multiple carriers and deliver more efficient value to clients.

More Americans Are Using Their 401(k) for Non-Retirement Purposes

As high inflation continues to impact the cost of necessities, such as groceries, gas, and rent, it is affecting how consumers prioritize their finances. Couple that with the ease of online shopping and access to credit cards and more Americans are finding themselves in excessive debt. Consequently, many are turning to an alternate source to cover those costs: their 401(k) account.

Consumers Continue To Spend Even During High Inflation 

In March 2024, U.S. prices rose 3.5% from a year ago, the third straight month that inflation has accelerated.² Gasoline and rent contributed to over half the monthly increase. In fact, the price of everyday goods rose 0.4% in February.³ But that hasn’t stopped Americans from splurging more and more since the pandemic. About 51% indulged in things like home theaters or gyms and 30% more plan to continue spending on their homes.⁴

Adding to the financial challenges is credit card debt. 46% of people were carrying debt from month to month, up from 39% a year ago.⁵ “The further you go down in income levels or the further you go down in wealth levels, the cumulative impact of inflation has really taken a toll,” said Wells Fargo CFO Michael Santomassimo. “In some cases, they have been having to build bigger credit card balances.”

Credit card borrowing has reached the highest level since 1996, with total credit card balances reaching $1.13 trillion in the fourth quarter of 2023. In addition, consumers are taking longer to pay off credit card debt.⁶ 

Retirement Accounts Used as a Hardship Resource

While designed to be retirement accounts, most 401(k)s allow for access to funds prior to retirement. Withdrawals, particularly hardship withdrawals and loans, are becoming more common.

Investment management company The Vanguard Group shows that 3.6% of their plan participants took early withdrawals in 2023 for financial emergencies (including paying medical and tuition bills), up from 2.8% in 2022. Nearly 40% of those who took a hardship distribution last year did so to avoid foreclosure, compared with 36% in 2022.⁷

Hardship withdrawals are used for unexpected, crippling expenses such as medical bills, urgent home repairs, or funeral costs. Unlike 401(k) loans, they don’t need to be repaid.

In the past, it was more difficult to qualify for hardship withdrawals and there were more stringent requirements to access 401(k) funds. For example, a hardship withdrawal could be denied if you had other assets you could draw on or if insurance covered the need. But changes in laws have made accessing these funds easier. A 2018 law did away with a requirement to take a 401(k) loan before a hardship distribution. Additionally, the U.S. recently allowed those affected by the economic downturn to borrow up to $100,000 from 401(k) plans.

Contributing to this behavior is the strong performance of investments. Average 401(k) account balances rose 19% in 2023, a welcome change from 2022, when falling stock and bond markets wiped 20% from the average 401(k) balance.⁷

For many, the strategy of only buying necessities and avoiding luxuries isn’t working. And the idea of using 401(k) savings intended for the future can be risky. But there are methods for saving. Until the Federal Reserve (Fed) starts to cut interest rates, consumers should take advantage of high interest rates for growing emergency savings and/or paying down high interest rate debt.

Comparing the Two Major Inflation Metrics

Analysts generally track two separate measures of inflation: the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index. When these two sources offer differing numbers, it can raise questions as to which to use and for what purpose. 

For March 2024, the CPI reported inflation at 3.5% while the PCE price index registered a 2.8% increase for the same month. So, what makes up these two metrics and which is correct? 

The CPI weightings are based on annual consumer surveys about their purchasing habits and are calculated by the Bureau of Labor Statistics. They track prices across many industries to get a good picture of how inflation is affecting the overall economy. 

The PCE price index on the other hand is calculated by the Bureau of Economic Analysis, based on Commerce Department data from business reports and government data captured on consumer purchases. That means the PCE price index can better capture substitution effects (i.e., consumers switching to cheaper options). 

Key Differences

The main differentiator between the CPI and the PCE price index is their construction — each index tracks a different number of items and uses different data sources. For example, CPI focuses more on urban households and their expenses and purchasing habits while the PCE price index has a broader scope, encompassing all households (urban and rural). 

Notably, many of the underlying price indices that make up the PCE price index come directly from the CPI. As you can see in the chart on the next page, the two are often close, but occasionally they diverge. In August 2023, CPI was 0.6% while the PCE price index came in at 0.4%, a difference of 0.2%. According to government resources, PCE inflation has been around 0.4 percentage points lower than CPI since 2000.⁸ 

Impacts to Insurance-Related Industries 

Auto insurance has had a large impact on the CPI, as the index for motor vehicle insurance was responsible for part of the 0.4% inflation increase reported for February.⁹ Housing costs are also a major part of the CPI’s makeup; expenses for homeowners and renters contribute about 34% of the index’s weight compared to about 15% of the PCE price index. On the flip side, there are areas that have greater weight in the PCE price index. For example, healthcare services account for only 6.5% of the CPI, but 16.1% of the PCE price index.¹⁰ 

Insurance brokers should follow metrics related to their individual clients’ industries since the rising costs of things like housing material, construction labor, or auto repair will naturally cause premiums to rise. 

Which Is Correct? 

The CPI — produced by the Labor Department — is generally thought of as the unofficial authority on inflation. It makes headlines, is featured in politicians’ speeches, and moves markets. But the Fed often focuses on the core PCE price index for monetary policy decisions. Therefore, both are technically correct but should be used for different outcomes. To understand how prices are growing over time, for instance, you may consult the CPI. If you’re looking into spending behaviors and an indicator of how healthy the economy is, the PCE price index will be your best bet. Ultimately, neither index can be a perfect measurement tool, but despite their differences, both the PCE price index and CPI can provide broader context into inflation trends. 

1. MarshBerry estimated by leveraging the Conning Report study on MGAs and other sources, including inquiry of market professionals, and A.M. Best as of September Past performance is not indicative of future results.
2. https://www.cbsnews.com/news/inflation-cpi-consumer-price-index-march-2024/ 
3. https://finance.yahoo.com/personal-finance/price-inflation-222903168.html 
4. https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/emerging-consumer-trends-in-a-post-covid-19-world 
5. https://apnews.com/article/federal-reserve-credit-card-debt-interest-rates-a2e1d35cb957153058d188652570c48e 
6. https://www.wsj.com/finance/banking/credit-card-debt-is-upand-its-taking-longer-to-pay-down-237cc4a3?mod=article_inline 
7. https://www.wsj.com/personal-finance/retirement/more-americans-are-treating-their-401-k-s-like-cash-machines-deaa3f8f 
8. https://www.whitehouse.gov/cea/written-materials/2023/09/29/crosswalk-talk-whats-the-difference-between-the-pce-and-the-cpi/ 
9. https://cepr.net/inflation-and-auto-insurance/ 
10. https://www.wsj.com/economy/central-banking/one-says-2-4-another-says-3-1-which-inflation-metric-is-right-5fbc6634