Impact of Inflation on the Insurance Industry
Introduction
We are living through a turbulent and uncertain time for not just Canada’s economy, but the economy on the global scale. Nowadays, inflation is all over the news. But not a lot of people know exactly what it refers to or how it’s calculated. Inflation refers to a general rise in the price of sectors of goods and services in the economy (such as retail, food and automotive). This leads to less purchasing power for both consumers and businesses, because the $1 you have today will not get you as far as it previously did. One example is if we take the price of a loaf of bread today compared to the price of the same loaf in 1970. A single loaf of bread in 2020 cost about $2.83. However, with the same amount of money in 1970, 7 loaves of bread could be purchased!
Consumer Price Index (CPI)
Consumer Price Index is the most widely used indicator for inflation in Canada. It is a weighted average of the price changes of a fixed basket of goods and services, based on expenditures of Canadians, through time (Drew, 2022). The fixed basket includes items that are representative of consumer spending patterns, and price movements are assigned a basket share that is proportional to the consumption expenditure for which they account (Drew, 2022).
CPI consist of 8 major components
Food Shelter / Household / Operations / Clothing / Footwear / Transportation Recreational / Drugs
Current Inflation Trends
The ideal inflation target range, set by the Bank of Canada, is at 1-3%. However, the most recent CPI indicated an 6.8% inflation rate in December 2022 year-over-year (Statistics Canada, 2022). This is the largest annual cost of living increase in over 4 decades!
According to the Bank of Canada, the Canadian economy is being influenced by both domestic and international forces.
Inflation was running hot before 2022 driven by higher commodity prices, higher energy prices, and supply shortages because of the COVID-19 pandemic. The Russia-Ukraine war has exasperated these issues, limiting the supply of gas and food, increasing their prices on a global scale. (Sep, 2022)
Federal stimulus checks led to a rapid increase in demand in the Canadian economy, which the already-burdened supply could not meet.
Inflation & Insurance
As prices of goods and services increase, insurance claims become more expensive for the insurer. Consequently, insurers cover their higher costs through higher premiums. Insurance shoppers may be at risk of being underinsured. Due to rising prices, policyholders need to ensure cost assessments are updated, and reflect the current replacement value of the asset or property insured. Insurance buyers may also be at risk of non-renewal. To increase their profits and manage risks from market turbulence, insurers may shift capacity in lines of business that are less impacted by inflation (L.M., 2022).
Home and Car Insurance premiums are expected to increase due to inflation. However, life insurance may not be affected as much, because benefits are defined at policy inception.
Auto Insurance
Car insurers take into account the age, gender, driving history, and auto industry costs. A jump in the prices of vehicles and their parts increases the costs of an insurance claim, and thus, leads to increases in premium
Market Conditions Affecting Auto Rates
Physical damage costs
New technology and increased vehicle thefts drive up physical damage claims
Drivers on the road
As more people return to office, traffic is becoming denser. More traffic increases chances of accidents.
Inflation
In June, parts, repairs, and maintenance increased by 6.1%, replacing vehicles by 8.2%, and renting vehicles by 28%. (W.C.I.S., 2022)
Recent Examples: The Financial Services Regulatory Authority of Ontario (FSRA) approved increased rates from several insurers including Allstate Insurance (↑4.99%) and Zenith Insurance (↑10.37%) (Golob, 2022).
Home Insurance
Similar to auto claims costs rising due to inflation, it also increases home insurance claims costs - which increase home insurance premiums. The cost of property repair and maintenance, home replacement, and rented accommodation have all increased. In June 2022, home and mortgage insurance rents went up by 4.9% (W.C.I.S., 2022). One might think that higher inflation means higher home prices, but as the interest rates go up, the cost of home loans go up - which leads to more people not being able to afford a home. This results in sellers dropping the asking price as a result.
Leveraging InsurTech
With no quick relief in sight, P&C insurance carriers might face challenges in underwriting capacity. Insurers that possess superior underwriting capacity and pricing strategies will come out with more profits. Investment in automations and straight-through processing rather than manual input, may cut down costs. Insurers can manage expenses by adopting self-service as customers show an increased preference for digital tools. This is also an opportunity to accelerate innovative loss-prevention capabilities. For example, satellite imagery can be used to preempt fire risk across the personal lines property portfolio (Javanmardian et al., 2022).
Advantages of Modern InsurTech includes (but are not limited to)
Automated client communications
Automated data-entries/data-updates
Automated CRM functions
Automated AR/AP calculations/management
Simplify & streamline complex operation processes
Key performance indicator reports
Provide self-serve options for clients, policyholders & shoppers
What Can Insurance Shoppers Do?
This is the time to communicate with your broker about the options you have if your policy is coming up for renewal. This may also be a good time to explore alternative brokers for better options.
Be Protective
Make sure you're finding the best team of experts who can help you with the claims process with ease, who offer user-friendly digital tools, and who provide you with more flexible options.
Using insurance for stability through uncertainty
Insurance can offer the right solutions whether you're restructuring your company, or facing macroeconomics factors.
Optimizing your risk profile or invest in risk management
Minimize your exposures to remain a low-risk client for insurance companies or avoid claims altogether by implementing risk management practices.
Summary
Inflation leads to higher costs of insurance claims, and the cost transfers to the wallets of insurance buyers through raised premiums.Home and auto insurance companies have already begun to introduce premium rate hikes and more and more insurers may likely follow suit in the near future. Insurers now face the challenge of managing their inflation exposures by factoring in rising claims costs into underwriting practices.This may be a good time to accelerate innovative loss-prevention capabilities made available by InsurTech companies. With the strategies mentioned on Pg. 8 in place, insurance buyers should be better suited to withstand turbulent market conditions and a high inflationary environment.