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Impact of Inflation on the Insurance Market

The impact of inflation is felt everywhere, from the grocery store, to the gas pumps, to every business that has tried to turn a profit. But more than ever, inflation is having an effect on the insurance market, and the insurance market is especially sensitive to the economic stressors that come with inflation.

Inflation has a different impact on the insurance market, from raising premiums, to leaving certain businesses unknowingly underinsured.

Why is Inflation currently so high?

The high level of inflation the world is currently experiencing is here for several different reasons.  Currently, the overall inflation rate in Canada is hovering around 8%. But this inflation number reflects a basket of goods and services, and this number differs when just a single industry is focused on. For example, in agriculture, the inflation rate is in double digits. While there is no single cause for this high level of inflation, it’s likely that most of the following have contributed:

COVID19 Pandemic

The COVID19 pandemic and related public health measures resulted in a number of changes in consumer behavior in a way that many businesses weren’t prepared for.

First, there was the push to stay home during which time consumers began purchasing products to make their time at home more comfortable. This caused there to be high demands for things like exercise equipment and game consoles, driving the prices of these items higher as they sold out everywhere and companies rushed to produce more. Then, as the world began to open up again, consumer demand for things like travel and leisure activities skyrocketed, again, driving the prices of these activities up..

The pandemic also caused the Canadian government to modify its fiscal policy in order to stimulate the economy and keep certain businesses afloat. An increase in the supply of money as a result of lowering interest rates created high consumer confidence.

The War in Ukraine

Inflation in Canada is at least partially caused by the current Russian and Ukrainian conflict. Products, such as sunflower oil which are largely produced in Ukraine, are no longer available to importing countries like Canada creating a strain on supply.

This has caused many food makers to increase their prices as they’ve had to change out ingredients, or make do with smaller batches. Some have imported sunflower oil from a different location, also increasing the cost.

Supply Chain Disruption

The pandemic is mostly over for the Western world, but the same can’t be said for the East. Canada imports many products from countries like China, Vietnam, and Thailand. China continues to face occasional lockdowns which has contributed to factory stoppages and supply chain strain.

In addition, oil prices have risen steeply due to worsening international relations with Russia which has compounding effects with household spending on gas, manufacturing costs and transportation/logistics costs for businesses.

How Inflation Affects the Insurance Market

The consensus view among economists is that the root of inflation is the increase in the supply of money relative to economic growth. In addition, there are inflationary trends that occur within an economy that businesses are sensitive to such as wage inflation and built-in inflation based on the idea that inflation will continue into the future. However, the insurance industry is also sensitive to what is known as social inflation which occurs when insurance companies see a rise in the cost of claims they need to pay out as a result of things like societal preferences and jury awards. In general, inflation driven by societal, supply chain or other related causes, will drive insurance premiums upwards.

While it can be disheartening to see a higher cost of insurance, businesses should be cautious about increasing risk by lowering coverage without contacting a professional consultant to help guide you.  A decrease in coverage could leave your company vulnerable to a disaster.

How Insurance Companies Respond to Inflation

When inflation is high, the insurance market will harden. This means that not only will premiums increase in price, but policies will be underwritten by insurers more carefully to take on less risk, because like most business owners, insurance companies also don’t like to take unnecessary risks.

During a hard insurance market, insurers may also leave the industry due to bankruptcy or other insolvency. This can leave large companies without coverage in a market where it may be very difficult to find the coverage they need at an affordable price.

Anyone looking for insurance during a hard insurance market needs to be aware that it will be difficult to get the best deal during this time. Rather the company should work to minimize their risk as much as possible with what the insurance company is willing to offer.

Don’t assume that this doesn’t leave room for negotiation however, and a company like Axxima can help you navigate your insurance policy offers during a hard insurance market to ensure you get the policy that is best for your company.

Will Premiums Increased During Inflation Ever Recede?

It can be difficult for a company to agree to pay higher premiums, even for a short period of time. This brings up the importance of regular reviews with an insurance broker.

While policies will increase throughout an entire period of inflation in order to minimize the risk the insurance companies take as they write policies, history suggests that inflation will eventually temper, and the prices of goods and services will stabilize.

It’s unlikely that pre-inflation prices will reappear, as they rarely do, but at some point the laws of supply and demand will cause insurance companies to stay competitive in a softening insurance market. When this happens, a company may only become aware if they have regularly scheduled meetings with their insurance broker to ensure they are getting the best coverage for the best price.

What a Business Should Do During Inflation

Below are the steps you should take to minimize your risks and ensure you are properly insured.

1. Schedule an Evaluation

Before contacting your insurance company, it’s important to be aware that the value of your property may have increased as a result of inflation. Schedule a valuation to find out just how much your building is worth, so you have a number to bring to your insurance company.

2. Ask for a New Quote

If your insurance company allows it, ask them for a quote for the increased coverage. Don’t be surprised if it is higher than your previous policy.

3. Get Additional Quotes

It may be time to shop around for other coverages. Ensure while you are asking for quotes, you remember that there may be a penalty for canceling your current policy early. Factor this into your costs.

4. Make a Decision

Being underinsured is dangerous, especially as the cost of goods and services continues to climb. After you have reviewed all of the information, make a decision as to what is the best policy for your company that will manage your risk effectively.

If you are struggling at any point along the way, Axxima can help. Contact us today to get started with a consultation.

Final Thoughts on Inflation in the Insurance Market

The insurance market, like any other industry, is sensitive to inflation, and in some cases it can be impacted even more.

Any company looking at their insurance policy during a period of inflation won’t like the news that they are going to pay more for their policy, but this is necessary, as inflation can also leave companies underinsured, which can be dangerous in the event of a catastrophe.

Not sure how much insurance your company needs? Contact Axxima today to discuss your risk management plan and the insurance coverages your business should have.