In recent weeks you may have heard the term inflation being thrown around in the news. In simple terms, inflation is nothing more than an increase in the price of goods and services in the economy which in turn reduces the value of money.
Normal Economic Conditions
Under “normal economic conditions”, the Federal Government controls inflation through monetary policy including management of interest rates. When inflation rises above the set target range limit of 3%, the Federal Government has the power to increase interest rates which in turn encourages consumer saving and discourages consumer borrowing. In theory, this will result in decreased consumer demand for products and services which puts downward pressure on demand thus reducing prices and in turn, inflation.
Sounds pretty simple, doesn’t it? Unfortunately, since the onset of COVID 19 the world has not been operating under “normal economic conditions”. Inflations rates are soaring as a combination of record government spending, supply chain disruption and a surge in demand for consumer goods have caused prices to rise quickly.
How Does Inflation Affect Insurance?
You may be asking at this point “Is this an economics or insurance blog? What does this have to do with insurance or the premium I am paying?”. Let me answer that for you.
Property insurance premiums charged by your insurer are based on a combination of the likelihood of loss and the cost to repair or replace insured property. Based on this assumption, premium increases are due to either an increased risk of loss or increased cost to repair or replace insured property. Historically, insurers have increased property premiums by 2-3% per annum as a standard adjustment to account for the increase in costs year-over-year to repair or replace the property in the event of a loss. In other words, this annual 2-3% increase was to adjust for inflation. Although the likelihood of loss has not changed since the onset of COVID 19 throughout 2020 and 2021, building reconstruction costs have increased significantly due to shortages and increased costs in labour and materials, supply chain constraints, and ongoing project delays. Recent reports indicate that rebuilding costs have increased by an average of 5.7% since September 2020 nationally and Statistics Canada has estimated the construction price index has risen 8.3% for commercial buildings since Q3 2020.
In short, the historical premium increase of 2-3% applied by insurers to account for inflation is no longer applicable under current economic conditions. The market is indicating that this standard premium increase for inflation will be moving upward to the 3-5% range which will be reflected in your premiums going forward.
My advice, if you have not already heard from your broker, give them a call to discuss how this will impact you and your business and how you may be able to mitigate future increases through such means as updated property appraisals or increased deductibles. The key is to be proactive as it appears increased rates of inflation may be around for a little longer than expected.
The Banker & The Broker, a recurring blog from Commercial Risk & Insurance Advisor, Terry Greene. After nearly 20 years working in finance, Terry brought his talents and immense understanding of business needs to Wedgwood Insurance in September of 2017. Since then he’s been helping local businesses of every size identify their risk and then designing an insurance and risk management solution.
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