The global COVID-19 pandemic took a huge toll on the economy. Canada has and will continue to adjust its inflation rates until it returns back to Bank of Canada’s target rate of 2 per cent. When the lockdown happened in 2020, the inflation rate fell below zero. This helped Canada’s economy to regain strength as a result of monetary support received during this time. However, the constant shift in closing and reopening economies all around the world made it difficult to bring the economy back to a balanced state. With that, it is expected that the Consumer Price Index (CPI) Inflation rate of 6.9 per cent in September 2022 in Canada will go down to 2.2 per cent by 2024.
Timeline of Canada’s inflation in 2022
Canada’s annual CPI inflation rate peaked at 8.1 per cent
Canada’s inflation rate eased to 7.6 per cent
Canada’s inflation rate decreased to 7 per cent
Canada’s inflation rate fell slightly to 6.9 per cent
What does inflation mean for businesses?
We recognize how challenging the effects of inflation can be on small to medium-sized businesses. As inflation soars, your margins will likely decrease, causing you to make difficult decisions around how you operate your business. Other ways that inflation can affect your business include supply chain and raw material shortages, decreased consumer spending as well as labor and hiring problems. No matter what industry you are in, inflation has likely impacted your business significantly.
How does inflation affect insurance companies?
The cost of claims payouts as well as the operating costs of insurance companies increase during periods of high inflation. Additionally, the market value of an insurer’s investment portfolio will decline as interest rates rise. Insurers will typically raise premiums to offset these rising costs. Inflation affects all lines of insurance and has a big impact on pricing and premiums. There is also a notable effect on replacement cost. Other industries that will feel a greater impact include construction and manufacturing, due to the increased cost of materials as well as supply chain pressures.
“What about my commercial insurance policy?”
The amount of money needed to pay back a claim will increase as inflation increases. Essentially, insurance rates and premiums must increase in order to account for the increased cost of repairing and replacing your property. While you may be tempted to lower your insurance limits to save a few dollars, this could result in you being underinsured on your policy when you experience a claim.
Ex. You are a contractor and you are required to use your commercial vehicle to transport goods and services to different locations. You recently get into a car accident and are quoted for the cost to repair your vehicle. Previously, the cost to repair your vehicle might have run you $6,000, but with inflation, your vehicle now costs $9,000 to repair.
Inflation has magnified the price of everything. This includes your rent, your maintenance costs, your tools and equipment costs, as well as your insurance costs. If you opted for the minimum amount of coverage when purchasing your policy, there is a greater chance that a claim submitted may exceed your set limits.
What other factors are affecting the insurance industry?
On top of inflation, the cost of healthcare has reached an altitude that is unsustainable, and natural disasters and accidents are also on the rise, putting a financial strain on insurance companies. Aside from these, the insurance industry is becoming more competitive.
The insurance industry has stagnantly been experiencing a hard market with the ongoing inflation of premiums that results in higher deductibles and stricter underwriting criteria. In response to the global pandemic of COVID-19, the insurance industry worked hard to supply financial relief to individuals, businesses and governments. The economy further experienced a downfall and an increase in perils and natural catastrophes that resulted in a higher-than-normal rate impact. As a result of technological advances and the increase in remote workers, businesses also faced high cyber-loss ratios and risks. Adverse to the high demand for insurance, new fields of operations are entering the market, which is increasing the market value. The increase in market value is adding to the competition in the insurance industry.
What should your business do to prepare for future claims?
Depending on your insurance provider, location and type of business you have, inflation will affect your insurance premiums differently. Taking action as soon as possible is important after noting the potential impact. To mitigate the negative effects of inflation, take these precautionary steps:
- Talk to your insurance broker
- Update your policy
- Get ahead of your policy renewal
- Invest in risk management
- Diversify your vendors
- Research domestic alternatives for materials and products
- Adjust contract and project budgets for inflation pricing
- Prepare a crisis mitigation plan:
To identify any coverage gaps or to inquire about comprehensive business insurance, contact Fuse Insurance today to speak with one of our premier brokers. Get started on your free quote by calling 1-866-387-FUSE (3873) or fill out our easy online application.