Impact of inflation on insurance

The Canadian economy is being influenced by compounding economic conditions, such as the global pandemic, supply chain issues, supply shortages, and inflation well above the Bank of Canada’s target range of 1-3%. The Bank of Canada believes that both domestic forces – such as excess demand in the Canadian economy – and international forces – such as supply shortages introduced by the pandemic and later amplified by the war in Ukraine – are driving inflation levels that haven’t been seen since the 1980s.

For the insurance industry, the confluence of these two forces is creating a risk environment filled with uncertainty. The long-term effects of the current environment are uncharted territory, but the immediate impact on underwriting, reserving, and cost of claims can be understood with some level of clarity. It is imperative that during these difficult market conditions that carriers focus on risk selection and capital management.

As the Bank of Canada raises interest rates to help control inflation, carriers are expecting to see a decline in their investment incomes. Increased interest rates improve reinvestment yields for new premiums, but reduce the value of existing bond portfolios, where most insurance capital lives given regulatory requirements. Higher inflation could lead to lower than expected or even negative equity returns.

To address the impact of inflation from an underwriting perspective, insurers need to be proactive and accelerate their understanding of inflationary trends on reserves and pricing. That means understanding new loss trends, and planning accordingly:

• Labour market tightening along all dimensions – Many indicators suggest the labour market has surpassed maximum sustainable employment, including the unemployment rate, which is at a series low. In turn, labour shortages are pushing wages higher which is resulting in businesses reporting capacity constraints including labour shortages.
• Supply chain disruptions – Supply chain disruptions have severely impacted specific goods, like vehicles and machinery parts, as well as commodities within the energy sector. This, in turn, has increased the cost of insurance claims for select insurance lines as businesses struggle with continuity through these delays in the supply chain. Supply constraints are still weighing on production and sales, and demand for goods is higher than expected.
• Other factors that continue to drive claims across specific lines of business. For instance, some reports indicate that Employment Practices Liability claims involving sexual harassment have more than tripled in value since 2015.

Times of uncertainty stress the importance of proactively monitoring, analyzing, and understanding leading indicators to determine the impact to lines of business. That way, we can leverage the data available to us to educate both customers and brokers to help them better understand the impacts to their businesses, too.

There are numerous ways that inflation has impacted, and will continue to impact insurance buyers:

• Buyers may be at risk of being underinsured – Inflation has resulted in changes to buyers underwriting exposures, making it ever more important to ensure value and limits are providing adequate coverage. Should the worst happen, expenses for insurance operations and claims could increase even more than already expected.
• Buyers may experience rate increases in lines of business that are more affected – Insurers may look to rise rates to counter increasing operating costs and claims losses, but those steps alone present their own challenges.
• Buyers may be at risk of non-renewal – During times of uncertainty, insurers may look to change risk appetite and increase capacity in lines of business that are less impacted by inflation to withstand market turbulence and increase underwriting profitability.

To help mitigate the impact of inflation, insurance buyers should remain collaborative and transparent with their insurance partners. It has arguably never been more important for brokers, buyers, and carriers to work together to develop smart solutions that strategically manage and mitigate risk. Consider:

• Partnering with a financially stable insurance partner, keen to build long-term relationships. When facing challenges, enlisting the right team of experts will provide you with stability through uncertainty. Reputable insurance partners, who understand the changing risk landscape, can provide the expertise to navigate difficult market conditions. It’s imperative for brokers, buyers, and carriers to work together to develop smart solutions.
• Staying proactive and protected. Enlisting the right team of experts can make a world of difference, especially in claims outcomes. Make sure you are not underinsured given the current rate of inflation.
• Using insurance to provide stability through uncertainty. Whether it’s internal challenges a company faces in its own restructuring, or external factors prompted by macroeconomic factors, insurance can offer the right solutions.
• Considering general risk management tactics including risk control, transfer, engineering, claims capabilities, and a wide range of products and services to manage your total cost of risk and reduce insurance premiums.

With these strategies in place, insurance buyers should be better suited to withstand turbulent market conditions and a high inflationary environment.

This document provides a general description of this program and/or service. See your policy, service contract, or program documentation for actual terms and conditions. Insurance is underwritten by Liberty Mutual Insurance Company or its affiliates or subsidiaries.