May 18, 2023 by David Gambrill
Canadian businesses are seeing a rise in the cost of their business interruption claims, causing BI to be one of their top risk concerns in 2023, according to a new report by Aon Canada.
“The sources of business disruption for companies have become a myriad of interconnected, complex, and diverse challenges,” Aon states in its report, Spring 2023 Insurance Market Update Canada. “The impact of the COVID-19 pandemic on the global supply chain was further amplified by the catastrophic climate events, the energy crisis, labour shortages, geopolitical instability, ransomware attacks, and social inflation.
“There is also the growing concern about the possibility of a global recession which may affect the supply chain further with the potential for insolvency and business failure.”
In response, Canadian commercial insurance carriers “are managing their exposures by limiting capacity through such means as re-examining indemnity periods in their coverages and placing a volatility maximum clause on commodity prices,” Aon states.
On a positive note, the brokerage observes, the challenges have motivated businesses to improve their business continuity planning and build stronger resilience against business interruption risks. This is now a must to secure the best deal on commercial BI coverage.
Investing in business interruption and natural disaster planning is not only good risk management practice, Aon says, “but it can also be a determining factor in securing favourable [insurance policy] terms.”
In commercial lines overall, insurance-to-value is critical, given the ongoing volatility of inflation, Aon reports.
Globally, the inflation rate soared from 4.7% in 2021 to 8.75% in 2022, Aon says. Canada was not immune, with the country’s interest rate — based on the Consumer Price Index, which measures the cost of a basket of consumer goods, including food, shelter, gas, etc. — rising from 3.4% in 2021 to 6.8% in 2022. It now sits at 3.9%, according to Statista.
Commercial property valuations and the accurate valuation of all business assets exposed to business interruption are critical, Aon notes.
“There is a continued focus on valuations and clients should expect this to be a focal point during their renewal process,” the report states. “Though most of the rehabilitation to valuations has been completed, recent claims have highlighted that this is not universal.
“Coverage restrictions related to reported values, such as co-insurance and margin clauses, have been more frequent. Ensuring total insured values reflect true costs is critical to closing any coverage gaps.”
Overall, Canada’s P&C insurance market is not expected to soften until 2024, Aon’s report suggests, because of ongoing challenges facing the global economy post-pandemic. However, Canada’s P&C insurers ended 2022 with a combined ratio of 85.4%, and commercial property insurers reported a healthy loss ratio of 48.26% for 2022 Q4, positioning carriers for growth in 2023, Aon says.
Referring to commercial property lines specifically, Aon notes insurers’ appetites for growth will be dependent on how well the business has addressed its risk exposures.
“Property rate increases continue but are fluid and largely dependant on risk profiles,” Aon observes. “The rise in reinsurance rates following challenging reinsurance treaty renewals has undoubtedly impacted the Canadian property market, causing more strain on pricing and capacity for primary insurers. The entire market will be affected as these increases flow through.
“Each insurer has their own strategy on how to manage the increase to reinsurance costs so clients can have a very individualized experience depending on their insurer, location, and risk exposures.”
Feature image courtesy of iStock.com/Panuwat Dangsungnoen