Insurance industry "no stranger to dealing with inflation"

Experts explain the pressure points in the Canadian P&C insurance sector

Insurance industry "no stranger to dealing with inflation"

Insurance News

By Bethan Moorcraft

The insurance industry is “no stranger to dealing with inflationary pressures,” according to Don Forgeron, president and CEO of the Insurance Bureau of Canada (IBC).

“We’ve dealt with it before, and we’ll continue to deal with it,” he said, alluding to Canada’s 31-year high inflation rate of 6.7% in March 2022. In the property and casualty (P&C) insurance sector, inflation is running higher than in the economy writ large.

“Homeowners’ replacement costs are running at 13% higher than pre-COVID. And on the automobile side, new vehicle prices are up over 7%, used vehicles are up 34%, and rentals are up 24%. These costs are going to find their way into the system,” said Forgeron, at Swiss Re’s 36th Annual Canadian Insurance Outlook Breakfast.

The COVID-19 pandemic has exacerbated inflationary pressures, partly due to supply chain shortages and delays. But Forgeron said the IBC was conversing with regulators and elected officials in different parts of Canada about inflation before the pandemic, in particular relating to auto physical damage and bodily injury.

“The takeaways for us on the inflation front are twofold,” he added. “On regulated lines, I think regulators need to take heed of these inflationary pressures. Unfortunately, I think the data that we’ve relied on for the last 10 or 20 years in terms of trying to predict future cost trends goes out the window. We have to be open to looking at new data given this New World reality.

“On the commercial side, I think this inflation is either going to prolong the hard market that we’re currently in, or it’s going to make the exit from the hard market all the more challenging. So, there are some very real impacts for our sector.”

On a macro level, an inflationary pressure that is “perhaps underestimated” is the impact of the war in Ukraine, according to Mike Mitchell, head of property and specialty underwriting at Swiss Re.

He gave the example of the semiconductor chip shortage. The confluence of soaring demand for consumer products that contain semiconductor chips (such as cars, personal electronics like laptops and phones, and medical devices) alongside COVID-19 pandemic-related disruptions in production has led to a major imbalance in supply and demand.

To make matters worse, Reuters reported in February that Russia’s attack on Ukraine could halt half of the world’s semiconductor-grade neon output, which is a critical element in the semiconductor production process. Limited access to neon gas could lead to further disruption and price increases in the already pinched semiconductor chip industry, which will likely have knock-on effects in major economies – including Canada – worldwide.

“If you just think about just that one little data point, and the impact of supply chain integration in our economy, I think that’s going to flow through into many other challenges,” said Mitchell.

Inflationary pressures are also driving up claims costs following natural catastrophes, which is a big issue for Canadian insurers. Some insurers are taking innovative actions to try and mitigate post-event inflation. For example, in 2021, Aviva Canada’s Global Corporate & Specialty division had conversations with vendors, with the idea of offering them credit to pre-buy materials so that they’re well-stocked and able to manage an acute influx of claims during a CAT event.

But even insurers who pre-negotiate provider agreements can struggle to meet inflationary challenges around soaring claims costs and an imbalance in supply and demand following a significant catastrophe event. 

Mitchell summarized: “We’ve got baseline inflation, which is something new for us, enhanced by COVID-19, enhanced again by the geopolitical situation – and the challenge that we face is if you throw a really big catastrophe on top of that, I think we’re probably exposed to an exponentially higher rate of disruption and inflation than we’ve anticipated at the moment.”

Related Stories

Keep up with the latest news and events

Join our mailing list, it’s free!