COVID-driven inflation causing significant challenges for insurers

“We’re seeing some really difficult numbers to soak into the [claim] costs”

COVID-driven inflation causing significant challenges for insurers

Insurance News

By Bethan Moorcraft

The Canadian economy has been on quite the “bumpy ride” through the COVID-19 pandemic. In 2020, the Canadian economy shrunk by about 5.4%, driven by a decline in commodity prices and depressed domestic spending as a result of pandemic-related stay-at-home orders and lockdowns.

Deloitte recently published its Economic Outlook for the June 2021 quarter in which it reported a drop in gross domestic product (GDP) of approximately $230 billion in 2020, which is almost four times the size of the drop experienced in the 2008-2009 recession. But Mario Iacobacci, a partner in Economic Advisory with Deloitte Canada, noted that Canada’s economic recovery was quick – bouncing back pretty much by the third quarter of 2020 – until recent months, when that recovery has “started to slow down”.

The COVID-19 pandemic and related economic challenges have triggered acute inflationary pressures in the Canadian marketplace. For example, over the last 12 to 18 months, inflation has dramatically increased the cost of building materials across North America. So far this year, the prices of lumber, shingles and sidings have all inflated by over 150%, and while prices are starting to soften, Canada’s overall inflation rate is still running at just over 4%, which is significantly higher than it has been for many years, and above the Bank of Canada’s preferred target range of 1-3%. These inflationary pressures are having an impact on the insurance industry, especially property and catastrophe lines of business, by driving up the cost of claims.

Paul Gilbody (pictured), senior vice president for specialty and property claims at Aviva Canada, recently took part in the Insurance Bureau of Canada’s 2021 Commercial Insurance Symposium, where he commented: “The overall inflation in Canada [is at] 4.1%, but we’re actually seeing nearly double that across claims – and that’s an industry number. We’re seeing some really difficult numbers to soak into the [claim] costs, particularly when we reserve years in advance, and obviously underwrite a year in advance and charge a premium for that.”

It’s not only the cost and availability of materials that have faced pandemic-related inflationary pressures. Throughout COVID-19, there have also been challenges with labor shortages. In the insurance space, for example, vendor contractor capacity has caused some issues, particularly in response to catastrophe (CAT) events, when there is an acute demand for contractors to assist with claims.    

“We’ve seen significant changes in labour [which has caused] inflation in the job market and [made it more difficult to get the] people we need to complete claims, particularly when it comes to larger and more complicated residential claims [or CAT events],” said Gilbody. “Certainly, some of the biggest vendors that we work with nationwide have really struggled to get the right type and the right number of people [working on] certain claims […] and that’s has a massive impact on not only the price of claims, but also the lifecycle of them.”

Iacobacci described the shock to the labour market caused by the pandemic as a story of “where you’re sitting, and what industry you’re sitting in”. Some sectors, such as accommodation, food service, construction, and agriculture took significant hits to employment in 2020, while others, like professional services, finance, insurance, and real estate saw increases.

“Finance, insurance, and real estate had a significant 50K plus increase in employment, and that’s why you’re seeing, at least in [the insurance] part of the labour market, shortages that are even more acute than they were pre-pandemic,” said Iacobacci. “[Insurance] employment has increased, but the labour pool that you’re drawing from has not increased very much - hence the very tight labour market conditions. And the people obviously that had the low wage jobs and […] lost their employment, it’s not easy for them to switch to the kinds of occupations that [are needed acutely in the insurance industry].”  

Inflationary pressures on materials, resources, and skilled labour are all causing the lifecycle of claims to go on for longer, Gilbody stressed. This is putting more pressure on underwriters, and, ultimately, is increasing the cost of insurance coverage in what is already a relatively hard market across many property and casualty lines of business.

“That leads me to the brokers,” said Gilbody, who has past experience working in the broker community. “I know that as prices increase, it’s harder to sometimes sell insurance, and it’s harder to sometimes have that conversation around value, particularly when there’s a need to look again at the level of insurance to the value of a [commercial] building. There’s a lot of pressure in that, particularly when certain businesses are struggling due to the other impacts of the pandemic.

“And then for customers as well, this is a bad time to be increasing prices. I think the typical sentiment out there at the moment is that companies and industries and governments should be helping customers. Our industry has done a huge amount to help customers, but I think those price pressures are really difficult for some people to swallow, because not everybody has all the facts to look at. It’s a complicated picture across the board.”

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