The annual pace of inflation in Canada rose to 3.6% in May 2021, up from a 3.4% gain in the Consumer Price Index (CPI) in April, according to Statistics Canada. This increase is part of an economic rebound following a COVID-19 pandemic-related plunge. It marks the largest yearly increase since May 2011, when the CPI posted a year-over-year gain of 3.7%.
Inflationary pressures over the last 12 to 18 months have dramatically increased the cost of building materials across North America. So far this year, lumber prices have inflated by over 170%, and shingles and sidings are following a similar trend. This is having an impact on the property insurance market as it is driving up the cost of claims.
“We’ve done a deep review of inflation over the last couple of months because it’s a big risk for insurers,” said Paul Gilbody (pictured), senior vice president for specialty and property claims, Aviva Canada. “Like all insurance companies, at the beginning of the year our actuaries make a judgement call on where they think inflation is occurring, and in certain areas and certain aspects, it’s currently defying logic.”
It’s not only the cost and availability of materials that are facing pandemic-related inflationary pressures. Throughout COVID-19, there have also been challenges with vendor contractor capacity, particularly in response to catastrophe (CAT) events, when there is an acute demand for contractors to assist with claims.
“The availability of contractors has been a significant issue during the pandemic,” said Gilbody. “At Aviva, we’ve been talking to a number of our big vendors to make sure that when a CAT comes, they’re able to respond both from a point of view of capacity and getting people out to respond to the event, but also that they have access to materials.”
To mitigate this challenge, Aviva Canada’s GCS team has been forced to “think outside the box,” according to Gilbody. The insurer has entered into discussions 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.
“In looking at the overall lifecycle of certain claims that we manage, we know that a relatively small but meaningful amount paid up front will actually save us all money in the long run,” Gilbody told Insurance Business. “That’s particularly true when it comes to commercial risks, because the longer a business is closed, the bigger the impact of the claim.
“Obviously, there are things that are out of our control. The geography of Canada is not always our friend, and, even in non-pandemic times, it can sometimes be challenging to get enough skilled resources and materials in response to CAT events. We can’t control the cost of materials, we can’t control the availability of resources, but what we can do is help our vendors to get as much supply in as possible, and work with them to ensure that our customers are looked after in their moment of need.”
Aviva’s conversations with vendors around pre-buying and pre-planning for catastrophes are still “embryonic,” Gilbody stressed. They’re born out of a “perfect storm” of events, he added, made up of the COVID-19 pandemic and related economic downturn, and an increase in the frequency of severe weather events across Canada, particularly flood, hail and wildfire.
“It forces you to think a little bit differently,” he said. “In a normal year, one might ask: ‘Why would I give vendors more money? Our job is to pay what’s due, and to minimize that for everyone’s sake.’ But I think we need to look at things a little bit differently at the moment. If the headline cost of a claim goes up slightly, that’s not necessarily a bad thing. When you stand back and look at the lifecycle of that claim, or the quantum of those claims in a CAT situation, some sensible and prudent up-front investment could actually prove beneficial in the long run.”