Deloitte report: How microeconomic factors will impact claims costs

Yes, overall inflation is high. One trip to the grocery store demonstrates that faster than a macroeconomics refresher lecture.

So will a glance at Canada’s June 2022 Consumer Price Index, which jumped 8.1% over the prior year to mark its highest increase in 40 years – before cooling slightly to 7.6% in July.

But for Canada’s insurers and the brokers who rely on their products, it’s the microeconomic factors that are having greater impact on pricing concerns, noted a new Deloitte report on the state of the country’s P&C industry.

Insurers and claims professionals have been reporting rising claims costs since spring, and Deloitte’s report pointed to three contributing factors:

• Rising home replacement costs (April’s home replacement cost index climbed 10%).
• An 8.2% hike in the price of new passenger vehicles.
• A 28.5% jump in the cost of rental cars, which are crucial to the repair and restoration process for auto insurance customers.

What’s more, it noted “labour actions by construction workers in Ontario will likely also contribute to increases in property repair costs.”

It’s not likely these diverse inflationary pressures were fully anticipated by the actuarial models used to price commercial policies, added the report.

“As a result, claims costs will be higher than expected,” it said. “This will put upward pressure on rates, particularly in the property and fleet lines, and likely delay any softening of the market.”

These microeconomic impacts are in many ways aftershocks of the sharp swings Canada’s overall economy experienced over the course of the pandemic.

The early months of 2020 saw Canada drop out of a decade of sustained GDP growth (averaging 2.1% annually) into “the deepest recession in [the country’s] post-war history, with the GDP declining 5.2%, and unemployment rising to 8.8%,” Deloitte noted.

But the recession was short and growth levels in 2022 bear closer resemblance to pre-pandemic levels.

“From a business perspective, economists believe the rebound will continue as businesses’ investments that were once postponed continue to ramp back up, with notable projects across energy, transportation and warehousing, and accommodation and food services,” the report said.

That underlying economic growth should bring commercial policy growth back to pre-pandemic levels, Deloitte said, but added the economic recovery has not been uniform across all sectors.

During 2021 Q4, business bankruptcies rose sharply due to closures in the food service, accommodation and construction sectors, and experts predicted the trend will continue this year.

“Canadian business insolvencies jumped 36.8% in the fourth quarter of 2021, likely driven by the end of the federal wage subsidy, which preceded the arrival of the COVID-19 Omicron variant and new restrictions,” the report said.

“Accommodation and food services saw a 75% jump in insolvencies between the third and fourth quarters of 2021,” it added. “Issues with business viability in these sectors creates additional risk for insurers and will continue to put pressure on rates and drive more intensive underwriting for these clients.”

Feature photo courtesy of iStock.com/MachineHeadz