DeepSummary
The podcast discusses the impact of the insurance industry on inflation, highlighting how rising insurance premiums can influence the broader economy. It explains how insurance is a crucial input for many industries in the production process, and increased costs, such as higher premiums, get passed on to consumers through higher prices.
The episode dives into how insurance premiums, particularly for property insurance, have been rising due to factors like natural disasters and elevated rebuilding costs. While insurance may not be a significant component of individual consumers' consumption baskets, it plays a central role in the overall U.S. production process, ranking among the top 15 most important industries.
The discussion also covers how the insurance industry's regulated nature means premium increases can take time to filter through the economy, leading to persistent inflationary pressures. The podcast concludes by advising investors to underweight longer-duration bonds in their portfolios, as higher inflation is likely to persist for longer, leading to higher interest rates.
Key Episodes Takeaways
- Rising insurance premiums, particularly for property insurance, have been a major news story and a driver of inflation, even as overall inflation levels have decreased.
- While insurance may not be a significant portion of individual consumers' consumption baskets, it plays a crucial role as an input cost across various industries in the U.S. production process.
- Insurers have been withdrawing coverage from areas prone to natural disasters like wildfires and floods, leading to increased premiums and rebuilding costs.
- Due to the regulated nature of the insurance industry, premium increases can take time to filter through the economy, leading to persistent inflationary pressures.
- The insurance industry's issues are likely to contribute to inflation remaining "stickier" at higher levels for an extended period.
- Investors should consider underweighting longer-duration bonds in their portfolios, as higher inflation is likely to persist, leading to higher interest rates for longer-maturity bonds.
- Geospatial data, natural language processing, and other alternative data sources are being used to analyze and gain insights into the insurance industry's impact on inflation and investment strategies.
- The interconnectedness of industries and the role of insurance as a central input cost are analyzed using input-output tables and other economic data sources.
Top Episodes Quotes
- “So ultimately, one thing to recognize is that the issues in the insurance industry are likely to move beyond just insurance itself. So we talked about how increases in prices for insurance are likely to continue for some time, but also that they might pass through the economy through the input cost channel. This is going to lead to inflation staying stickier at higher levels for a longer period of time.“ by Mike Penske
- “So from a portfolio perspective, the way that we tend to think about this is that higher inflation for longer likely means that you need more compensation, more return for holding bonds over longer maturities. So set in a simpler way, higher interest rates for longer maturity bonds.“ by Mike Penske
- “Within these input output tables, within one of the more granular formats, we can look at something like 380 different industries and understand what inputs of one industry are related to the outputs of another.“ by Mike Penske
- “But the story really started with insurers pulling out from natural disaster prone areas, especially those that have recently encountered increased wildfire and flood risk.“ by Mike Penske
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Episode Information
The Bid
BlackRock
4/19/24
You might not think of insurance as such a key input to their overall consumption basket, but the impact of the insurance industry is felt far beyond what individual consumers pay for individual policies and extends broadly throughout the supply chain as a necessary input for many industries in the production process.
Mike Pensky, portfolio manager within BlackRock's Multi-Asset Group joins Oscar to help us understand the connection between insurance and inflation, the possibility for rising insurance premiums to persist, and how investors can position their portfolios in a new market regime.
Sources: Insurance, Inflation, Issuance, BlackRock Insights, Dec 4th 2023; Bureau of Labor Statistics, March 2024
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