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Podcast #27: Interest Rates and Insurance

June 03, 2024

 

Hi Everyone,                                                                                                                                                                                                                                       #27

Today I want to offer some perspective about interest rates and insurance.

Before we begin, a housekeeping detail. If you made any contribution or rollover to an IRA, you probably received a rather urgent looking email from Schwab about a tax document available – Form 5498. Well, it is not urgent. As Brian said, if it were, the form would have been sent prior to April 15.

It is an informational only form. You can just file it away. Or, know there is one on your personal portal should you ever need it.

Now, a definition about interest rates. There are two ways to view interest rates. The first is called nominal interest rates. When you see the interest your money market paying – say 5%, it is nominal interest. However, if you subtract the inflation rate – it is called “real” interest.

According to the monthly Fed table, real interest for the last 50 years until the Great Recession was 2.7% above core inflation. The Fed target for core inflation is 2%. Assuming inflation continues to decline to the Fed target – 2.7 plus 2 is a 4.7 nominal interest rate.

The 10-year treasury as of this writing is 4.5%. As you can see, what is happening is our interest rate is normalizing. It was artificially held back by the Fed. The wisdom of that is still being debated but we as consumers got used to artificially low interest rates.

When Bonnie and I bought our current house in 2001, the interest rate was 7%. According to Rocket Mortgage, the 30-year fixed mortgage in the 1990s ranged from a low of 8.1% to a high of 9.8%. In the 2000s it went from a high of 8.2% down to 5.1% and continued its descent in the 2010s and 2020s.

As unpleasant as it is, we are seeing a normalization of interest rates. The bonus is our money market funds and bond funds now actually pay something.

It’s no secret insurance rates are skyrocketing. My auto insurance increased 25%. And, my carrier refused to renew Financial Connections’ business liability insurance because of our geography. I don’t know anyone who hasn’t been faced with insurance issues.

There is no single cause. First a bit of background. Insurance carriers buy their own insurance through what are called reinsurers. Insurers such as AAA purchase insurance from multiple reinsurers to reduce their risk of major claims.

Now add the effects of global warming on weather. Think tornados, fires, other extreme weather and what was an occasional major disaster becomes almost routine. In the case of Financial Connections’ business insurance, we are in a fire zone even if not literally. Guilt by association you might say.

Reinsurers, facing more disasters every year, raise their premiums to the insurance carrier who passes it along to us.

On the auto side, a different set of causes. According to Bankrate, the average auto insurance premium rose 26% this year so I’m right in line.

The price for car ownership is rising. According Forbes, repair costs and disaster-related claims are contributing factors. How many cars do you see on the news demolished by tornados and floods? Inflation also adds to the cost of repairs.

CNBC writes cars are 33% heavier than years ago. With heavier vehicles, collisions are more severe.

Let’s not forget that all those safety features contribute to higher repair bills. “Your average regular car now is basically a rolling network of computers,” said David Goldsmith, a repair shop owner in Brooklyn.

We can use my car as an example. A rock hit my windshield and the crack spread. I had to replace it. I took it to the dealer. They wanted $2500. Sticker shock. I took it to an independent repair shop who used glass from China. It was much cheaper but I had a choice – for a few hundred dollars more, they would sync the glass to the windshield wipers – the way the car was designed when I bought it. I ended up paying $850. A lot for something that can happen again but better than $2500.

 

I think it is time for some good news.

Let’s talk about wind power using turbines. They have been around a long time but some of the old turbines are past their useful life. A method has been developed to repurpose the old turbines, referred to as revamping. Using new components, the old turbines are generating more energy output with reduced noise. Denmark, an early adapter of wind energy, had a gain of 1.3 gigawatts utilizing 109 fewer turbines. 1 GW of energy can provide power for 750,000 homes.

It’s no secret electric vehicles are constantly in the news as a method to reduce carbon emissions from a car using gasoline. However, EVs also have issues with their batteries, especially the lithium batteries that are expensive and use precious minerals such as cobalt and nickel.

Oregon State University hopes to trigger a green battery revolution. A paper published by chemist David Ji in Science Advances discusses the development of a prototype made from iron metal, the cheapest commodity. It takes chemical energy and converts it to electrical energy. Besides car batteries, it can be used in such devices as cellphones and laptops. This would go a long way to reducing costs and as we’ve heard before lithium batteries can be combustible.

All of us at Financial Connections wish you an enjoyable summer. Please don’t hesitate to contact us if you would like to talk and catch us up on what is going on in your life.

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