Inflation & Insurance Costs

A combination of factors, including the COVID-19 epidemic, supply chain interruptions, greater manufacturing costs, and Russia’s invasion of Ukraine, has resulted in the greatest levels of inflation in Canada in years. This has a significant impact on Canadian companies and the insurance sector.

This week’s RIMS Canada conference in Halifax had a lot of discussion on the growing cost of living among insurers, brokers, and risk managers. Rob Marsh, president of Liberty Mutual Canada, discussed how inflation impacts insurance costs and coverage, as well as items to consider when it’s time to renew your policy.

“If inflation rises, so will our loss costs, or the amount it costs us to pay out claims.” In general, and quite simply, this will cause interest rates to rise “Marsh said. “However, pricing is not the sole solution. One explanation for this is because prices have been steadily increasing for many years, and the market can only absorb so much.”

Commercial insurance direct written premium (DWP) in Canada increased by 7% in the first half of 2022 compared to the same period previous year. Marsh calls it a “solid performance,” but it pales in comparison to the 22% increase in DWP in the first six months of 2021.

“It’s evident that things are going down in a huge manner,” he remarked. ” Rate hikes last year aided that 22% significantly. This tendency of double-digit rate rises will decrease, as we have seen when circumstances change.

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Marsh said that if insurers are to cope with inflation, they must be “extremely proactive” in gaining a better knowledge of inflationary tendencies and how they effect insurance rates and reserves. To cope with the implications on pricing and the whole portfolio, most insurers are focused on underwriting excellence and risk selection.

“It’s not just about the money,” Marsh said. “How does your portfolio look? What is the purpose of that? What is the length of the tail between the first-party and third-party lines? How does all of this come together to get the best return on investment?”

The Liberty Mutual CEO also said that government data are often a bit behind what’s actually going on, which is evident when discussing claims on a daily basis.

Marsh commented on how Liberty Mutual is dealing with inflationary pressures with its broker partners and customers “It’s all about being proactive in monitoring and tracking many of these trends, as well as being upfront and honest with our clients.

“We make it a major priority to utilize all of the tools available to us, not just in Canada but across the globe, to have these discussions, because this is an issue that affects everyone. Some trends are more prevalent in Canada than others, but in the end, many of these trends are worldwide, and how we cope with them will be determined by a variety of factors.

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Marsh went on to illustrate how inflation impacts insurance firms’ financial statements. According to him, as interest rates rise, insurance firms lose money on their investments. Most people believe that when interest rates rise, investment portfolios for insurance firms will increase in value.

“In the end, the two levers we have to achieve a return on capital are profitability or investment return,” Marsh added. “When we see such a large rise in inflation, especially at this rate, we actually take quite a hit on our investment portfolio, on anything we already owned, because we’re usually invested in much more conservative instruments (bonds, fixed income, etc.) because of the nature of our business and the need to have capital… when claims are coming, but also because regulations require us to do that.”

According to Marsh, the business has experienced “a pretty excellent period of stability” since the financial crisis over 15 years ago. Interest rates were approximately 4% when the financial crisis occurred in 2008. They have since fallen below 1% and have not risen beyond 2% in the previous 15 years.

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“We managed to pull it off.” We could see where we were heading, particularly in long-tail business sectors “Marsh said. “But the level of volatility and base point rises we’ve seen in recent months and quarters have placed a strain on [the industry’s] balance sheet. This is due to rising inflation. As a result, the quantity of capital on the market is greatly reduced.

“When 2022 started, our industry was in a rather steady state. I’m not concerned about it in general, but when you consider the hundreds of millions of dollars lost due to changes in interest rates and how they affect the portfolio, it really puts a strain on things, and we can’t invest the same way we planned to maybe this time last year, when we were planning for 2022.”

According to Marsh, insurers will concentrate on portfolio variety, risk selection, and excellent underwriting in the future. In addition, he said, “Clients must understand how the underwriting process works and how to distinguish one risk from another. The phrase “no danger” refers to the same idea. When it comes to determining that distinction, there may be a lot of rigor.”

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