Canadian Underwriter

Exiting the commercial hard market may be prolonged: Insurers

April 5, 2022   by David Gambrill

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Canada’s P&C insurers are exposed to historically-high inflation rates, which may prolong the hard market in commercial lines, Canada’s association of home, auto and business warns.

“On the commercial side, I think this inflation is either going to prolong the hard market that we’re currently in, or it’s going to make the exit from the hard market all the more challenging,” said Don Forgeron, president and CEO of Insurance Bureau of Canada, and panellist at Swiss Re’s 36th Annual Canadian Insurance Outlook Breakfast on Apr. 5.

“CPI [Consumer Price Index] is running at 5.7%, which is, I think, close to a 30-year high,” Forgeron observed. “For our sector, it’s running even higher than that. Homeowners’ replacement costs are running at 13% higher than pre-COVID…Construction costs [are] increasing. On the automobile side, new vehicle prices are up over 7%, used vehicles are up 34%, rentals are up 24%.

“So, these costs are going to find their way into the system.”

The impact on the global economy of Russia’s invasion of Ukraine will also have knock-on effects on inflation, said Mike Mitchell, head of property and specialty underwriting for reinsurance at Swiss Re. He noted the world economy is already experiencing inflationary pressure due to the pandemic, but that’s not the only factor leading to inflation.

“Something that is perhaps underestimated is the impact of the current situation in Ukraine, and how that flows through to other areas,” Mitchell said.

Citing the research firm Techcet, Reuters reported in February that Ukraine is a major producer of neon gas critical for lasers used in chipmaking, and supplies more than 90% of U.S. semiconductor-grade neon. About 35% of palladium, a rare metal also used for semiconductors, is sourced from Russia, per Reuters.

“Neon gas…is absolutely essential for the production of silicon chips, which are absolutely essential for the production of automobiles,” Mitchell said.

“Just think about that one little data point, and the sort of impact of [that on] supply chain integration in our economy,” he said. “That’s going to flow through into many other challenges.”

Mitchell observed many factors are leading to the fragility of the global economy right now. But throughout all of it, insurers must be watching for the next major catastrophe to happen on top of that.

“I think you’ve got the baseline inflation, which is something new for us, enhanced by COVID, enhanced again by the geopolitical situation,” Mitchell said. “And the challenge we face is that if you throw a really big catastrophe on top of that, I think we’re probably exposed to an exponentially higher rate of disruption and inflation than we’ve anticipated at the moment.”

Forgeron said he hopes the industry’s regulators will be live to the challenges of historic inflation on insurers’ books during the rate-setting process.

“I think regulators need to take heed of these inflationary pressures,” he said. “And unfortunately, the data that we’ve relied on for the last 10 or 20 years in terms of trying to predict future cause trends, I think that kind of goes out the window. I think we have to we have to be open to looking at new data given the New World reality.”


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