Why insurance is (still) keeping your mortgage rate high

Everyone wants the Fed to cut rates but…

Why insurance is (still) keeping your mortgage rate high

Motor & Fleet

By Ryan Smith

Rising insurance rates are pushing up overall inflation, according to the head of the Federal Reserve. And that, in turn, could keep the Fed from cutting rates for even longer.

Inflation rose to 3.2% last month, frustrating the expectations of economists who had expected it to remain unchanged from January’s rate of 3.1%.

The unexpected rise has spurred worries that the Fed may have to wait even longer before cutting interest rates from their current 23-year high, according to a Financial Times report.

And rising insurance costs are a significant driver in keeping inflation high, Fed chairman Jerome Powell said during congressional testimony last week.

“Insurance of various different kinds – housing insurance but also automobile insurance and things like that – that’s been a significant source of inflation over the last few years,” Powell said. “And it’s to do with a million different factors.”

Auto insurance a key driver

Omair Sharif, founder of research company Inflation Insights, told The New York Times that auto insurance costs are adding significantly to overall inflation.

Auto insurance rates have been rising, and are expected to surge by an average of 12.6% this year. The increase in rates has been partly driven by the rising cost of vehicle repairs. That cost is now bleeding through to insurance premiums, Sharif told the Times.

The Times reported that the impact of car insurance on inflation could lessen over time as the delayed effects of higher vehicle costs are incorporated into insurance premiums. However, it’s not clear how long that will take.

Climate issues driving up P&C costs

Medical insurance is also higher, helping to drive inflation. And tenant and homeowners insurance costs have skyrocketed, driven by climate-related issues like natural disasters and rising sea levels. Even with rising rates, climate-related issues helped drive a $38 billion net underwriting loss for the P&C sector in 2023 – the highest loss in a decade.

“In the longer term, companies are withdrawing from writing insurance in some coastal areas,” Powell said in his testimony. “It’s a significant issue.”

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