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:

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:

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:

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.