Inflation has grown in importance over the previous year. The COVID-19 pandemic-related labor and supply trends have largely contributed to the country’s inflation problems, which are amplified by the country’s rising consumer price index (CPI). The most recent Statistics Canada data show that consumer prices rose 5.7% year over year, up from a gain of 5.1% in January 2022—the highest increase since 1991.
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Issues with inflation could pose a number of difficulties for insurers and policyholders in the commercial insurance market. In light of this, it’s essential for insureds to understand inflation and take action to ensure adequate coverage during these challenging market conditions.
Learn more about the main causes of the current inflation problems, how they affect the commercial insurance market, and what policyholders can do to alleviate related coverage concerns by reading the article after this one.
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Key Inflationary Causes
Concerns about inflation have increased as a result of a number of factors, including the ongoing COVID-19 pandemic and widespread labor shortages and supply chain disruptions. These factors are broken down as follows:
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Lack of workers
In nearly every sector, there has been a labor shortage over the past year. These pervasive labor shortages are caused by a number of factors. The impact of the pandemic has primarily led to many workers reevaluating their employment priorities and making unemployed people wary of reentering the workforce; as a result, the percentage of people who have been out of work for six months or longer is still 32,000 higher than in February 2020. Businesses have struggled greatly as a result of the labor shortages, which frequently result in production or project delays and force some employers to raise salaries in an effort to retain or recruit workers. These patterns have ultimately increased labor costs generally and led to worries about inflation.
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Disruptions in the supply chain
There have been many supply chain disruptions since the pandemic first started. The majority of these problems were caused by rising demand for various goods and materials in the midst of production slowdowns and a lack of supply during pandemic-related closures. The consumer demand for some goods and materials has persisted in exceeding inventory levels even as businesses have resumed their regular operations and raised production levels. This is probably due to an increase in the number of consumers using their accumulated savings throughout the pandemic to make large purchases. In order to help offset demand and address these supply chain issues, the price of many goods and materials has increased across industry lines, which has added to inflation problems.
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Looking ahead, economists predict that the state of the supply chain will improve in the second half of 2022, reducing the likelihood of disruptions and easing inflation worries. However, through at least 2023, it is anticipated that a combination of ongoing labor disputes and other long-lasting effects from COVID-19 will keep the inflation rate above pre-pandemic levels. As a result, inflation problems might last for quite some time.
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Effect on the Market for Commercial Insurance
Multiple challenges may arise in the commercial insurance market as a result of rising inflation fears. Looking back, the insurance industry was affected in many ways by the persistent inflation problems that occurred between the 1970s and 1980s. Particularly, the commercial insurance market experienced lower reserve levels, erratic claims trends, and poorer underwriting performance, which resulted in significant losses for insurers and more difficult coverage for policyholders.
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It’s crucial to remember that due to excessive investment gains, the insurance industry as a whole is currently better prepared to sustain losses to its reserves than it was during previous periods of prolonged inflation. Additionally, improvements in financial reporting procedures have given insurers more tools to spot and address loss trends. The stability of reserve levels and underwriting profitability in the insurance industry over the long term, however, may be threatened by uncertainty regarding how long current inflation problems will persist.
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Looking more closely at particular lines of coverage, the markets in the following list are susceptible to being impacted by rising inflation:
Commercial property—Due to a lack of laborers in the construction sector, the cost of rebuilding or repairing buildings after a loss has skyrocketed in the world of property insurance. At the same time, problems with the building materials’ supply chains led to a sharp increase in the cost of these components. In particular, lumber prices have nearly tripled in North America since August and are getting close to records set in the spring. A significant CPI increase over the previous year for a number of structural components, such as flooring, window coverings, large appliances, and general construction materials, further supports the notion that there has been inflation. Poor underwriting outcomes brought on by high property loss costs may prompt insurers to raise policyholder premium costs and impose more coverage restrictions. Following more significant property losses, policyholders might be concerned about potential underinsurance because higher repair and rebuilding costs raise the overall claim severity.
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Auto insurance costs for commercial vehicles have increased as a result of rising vehicle repair costs and subsequent claim costs. This trend is primarily the result of a lack of workers in the automotive sector, which has led to increased labor costs and supply chain disruptions for several essential vehicle parts (and vehicles as a whole), which has raised the cost of such goods. Similar to the property insurance market, the auto insurance industry may see a decline in underwriting profits as a result of higher loss costs. Higher loss costs may lead auto insurers to increase premium costs and limit the coverage options available to policyholders, especially in a market that has been largely unprofitable for the past ten years.
Even though the property and auto insurance markets are currently feeling its effects the most, other market segments will likely start to feel its effects in the future. This implies that maintaining insurance rates to reflect more volatile loss trends may prove challenging for insurers.
Due to concerns about rising inflation, insurers may need to keep raising overall premium costs and making other coverage adjustments in order to avoid unanticipated loss costs and increased loss ratios.
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What Insureds Can Do
It’s critical for policyholders to take all reasonable steps to reduce such complications because persistent inflation problems have the potential to lead to increased premium costs, coverage limitations, and underinsurance worries. These are some actions that those who are insured can take:
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Have early discussions about policy renewal. Policyholders should collaborate with their dependable insurance professionals to discuss the process of coverage renewal well in advance, especially given the current difficult market conditions. By doing this, insureds will be able to stay up to date on the most recent inflation trends and have plenty of time to get ready for potential policy changes—particularly those that affect pricing—before their policies are renewed. In order to make sure they can modify their coverage as necessary in this changing inflation environment, policyholders may want to schedule quarterly meetings with their insurance professionals going forward.
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Review the conditions and terms of the insurance. Policyholders should make sure to get assistance in reviewing their coverage terms and conditions when meeting with their dependable insurance professionals, paying attention to any exclusions. Additionally, it’s critical for insureds to evaluate their policy limits (and sub-limits, if applicable) to see if they will have enough coverage in the event of a loss. In order to maintain adequate protection, policyholders or insurance professionals may want to update their coverage and think about buying policy endorsem*nts.
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Reevaluate the value of properties. Policyholders should confirm that their commercial property insurance coverage accurately reflects the value of their properties. Insureds must make sure the valuations used in their policies would be able to cover current recovery costs in the event of a loss given the rising cost of property repair and rebuilding. If, however, the cost of repairing or rebuilding a policyholder’s property exceeds the coverage limits currently in place, outdated valuations may leave them underinsured.
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Establish effective risk management procedures. In order to avoid potential claims, policyholders should lastly make sure they have strong risk management practices in place. Policyholders may even be eligible for premium discounts if they keep track of these precautions and inform their insurers of them.
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