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Is Your Business Ready for Inflation: The Impact on Your Premiums

Rising inflation rates influence every sector, and your business’s insurance expenses aren’t immune to their impact. The intricate dance between inflation and insurance costs highlights a critical challenge for businesses navigating the current economic landscape. Understanding how insurance inflation affects the insurance marketplace, from casualty insurance to insurance carriers, is essential for safeguarding your financial health.

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Impact of Inflation on Property and Casualty (P&C) Insurance

In the Canadian insurance industry, the cost of insurance is significantly impacted by the inflation of claims payouts. The cost of claims has a profound effect on the overall landscape of Property and Casualty (P&C) insurance.

One key factor contributing to higher claims payouts is the surge in repair and replacement costs, particularly in the automotive and construction sectors. This surge is directly linked to inflation, as it drives up the prices of building materials and auto parts, further aggravated by disruptions in the supply chain. For example, the microchip shortage has led to increased costs for new cars and auto repairs, thereby impacting insurance premiums.

According to SGI Canada’s 2022-2023 report, every sector experienced increased loss ratios in 2023. The report states,

One major cause of the increase was significantly higher costs in auto claims in the provinces those products are sold (Saskatchewan, Alberta, and Ontario).

Auto insurance rates are closely tied to the claims losses, so significant or sustained increases are likely to impact customers’ premiums in the next renewal cycle. The weather-related losses in 2023 have been unprecedented, with at least 23 catastrophic losses recorded in Canada, surpassing the previous record set in 2022. As the cost of claims and the number of claims increase, insurance companies need to anticipate their loss ratio for the upcoming year and balance that out with the premiums being charged.

Moreover, the escalating costs of building materials and skilled labour have a direct influence on property insurance expenses. Between 2017 and 2023, the construction price of residential buildings in Canada has outpaced that of commercial buildings, with residential building prices rising by approximately 75% in the last quarter of 2023 compared to 2017. This significant increase in construction costs directly contributes to higher claims payouts in the property insurance sector.

Additionally, labour shortages in the economy have pushed up wages, especially for lower-tier jobs, even before the pandemic. These wage hikes, fueled by the ‘great resignation’ trend during the pandemic, have led some employers to scramble to fill openings. An RBC Proof Point commentary expressed concern that there is the potential for a counterproductive impact of persistent strong wage growth, which may push the price of goods and services beyond actual purchasing power. This scenario can further contribute to higher claims payouts and, consequently, impact insurance costs.

Similarly, in its July report, the Bank of Canada highlighted that while the labour market had shown signs of easing, the unemployment rate remained historically low, with wage growth ranging between 4% and 5%, higher than what is consistent with price stability.

Strategic Adjustments by Insurers

To cope with increased costs, insurance premiums are on the rise. During high inflationary periods, insurers need to adjust rates adequately, and policy terms may be shortened to manage risk more effectively. They are also advised to revise property valuations and increase limits by 10% to 30% to keep pace with rising costs.

Allocating more resources to the pricing department and adjusting loss reserves to reflect higher inflation are critical steps. If inflation exceeds the rate built into loss reserves, future payments could surpass expected amounts, leading to significant financial discrepancies.

These factors collectively contribute to the ongoing adjustments in the insurance marketplace, necessitating both consumers and insurance carriers to remain vigilant and proactive in managing coverage and costs.

Predictions for the Future

Statistics Canada reported that the annual inflation rate dropped to 2.9 percent in January, down from 3.4% in December. This report brings good news for consumers as price growth decelerated in five out of eight components of the index.

BMO chief economist Douglas Porter mentioned that the one caveat to the report is that it was followed by two disappointing months for inflation. Canada’s inflation rate briefly dipped below three percent in June, falling to 2.8%, but it ticked back up in the second half of 2023 as underlying price pressures proved to be stubborn.

Let’s get another month or two of below 3% readings before really rejoicing.

Looking into the future, worldwide influences may slow the recovery rate of inflation in the short term for Canada and the province of Saskatchewan. However, the long-term outlook shows a slight decrease in inflation expectations to 2.4% over three years, suggesting a potential stabilization that could moderate the pace of premium increases in the insurance sector.

The recent shock of resurging inflation has heightened risk awareness among consumers, potentially increasing the demand for insurance as people seek to protect the value of their assets against inflationary losses. If the inflationary environment persists, it could profoundly affect all insurance sectors, leading businesses to continually adjust their strategies to cope with the evolving economic landscape.

While it is challenging to predict precisely when or if insurance rates will decrease, most industry experts agree that a slowdown in the rate of premium increases is the most optimistic scenario for the future. This perspective encourages businesses to prepare for a gradual adjustment rather than a sudden decrease in insurance costs.

Strategies for Consumers to Mitigate Higher Premiums

1. Optimize Discounts and Deductibles:

● Leverage Discounts: Many insurers offer reductions in premiums for measures that increase safety or reduce risk, such as safe driving records or installing security systems. Some insurers may also offer loyalty discounts for long-standing clients, so inquire if this applies to you before deciding to move your insurance to another company.

● Adjust Deductibles: Consider increasing your deductibles to lower your premiums. This means you’ll pay more out of pocket in the event of a claim, but your regular payments will be less.

2. Payment Strategies:

● Full Payments: Setting up paying your policy in full rather than in installments can often result in lower overall costs. Typically payment plans include a financial fee or installment fee, ask your advisor if you’re currently on a payment plan how much you would save if you switch to annual payments.

3. Inflation Protection and Policy Management:

● Inflation Protection: Some policies include features like Insurance Inflation Protection, which adjusts the value of benefits to keep pace with inflation, ensuring your coverage remains adequate over time.

● Regular Reviews: Regularly reassess your coverage needs and the value of your insured assets. This is particularly crucial during periods of high inflation to ensure that coverage limits are adequate and that your policy reflects your current business activities and profits.

Looking ahead, the predicted stabilization in inflation rates offers a glimmer of hope for a more manageable insurance landscape. Nevertheless, the demand for comprehensive insurance strategies will remain, driven by the need to mitigate the economic pressures of inflation. It’s clear that staying informed and adaptable is key to navigating the evolving insurance market, ensuring businesses can continue to thrive despite the economic challenges ahead.

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