Where Aviva thinks insurers are feeling inflation’s impact most acutely

Inflation is wreaking havoc in all major lines of P&C insurance, but its effects seem to be most acute in auto insurance, particularly auto physical damage, reports Aviva Canada CEO Jason Storah.

“The most acute impact we’ve seen so far in the P&C industry is on the auto side,” Storah told Canadian Underwriter during a conference call about the company’s 2022 half-year results.

“Auto physical damage inflation is running in the mid-to-high teen digits. Bodily injury inflation is a lot lower. But we all know if you want to buy a new or a used car these days, it’s more expensive, and you’re going to wait an awful lot longer. I think everybody sees that [when] there’s supply chain pressure in the auto industry generally, that means there just isn’t the availability of cars.

“For us, that means not only are cars more expensive to fix or to replace, but it also means customers are in rental cars for longer because their cars are in body shops for longer.”

Three years ago, insurance claims sources told Canadian Underwriter that each day it takes to figure out what to do with a totalled car, insurers could pay out collectively up to $900,000 extra in car rental and storage yard fees.

Inflation not only drives up an insurer’s auto physical damage costs because of the increased costs of cars, parts and replacement, but it also contributes to the need to increase the wages of the car repairers. This in turn expands the cost of an insurer’s repairs.

Also, repair cycle times — which dictate how long car rentals are required (thereby affecting insurers’ auto physical damage results) — can become longer due to labour shortages in the auto repair industry.

“I think labour and wage inflation is likely only going to go up over the next little while,” Storah said. “I’ve seen some reports say maybe we’ve peaked in terms of the physical damage and the cost of the manufacturing of the vehicles. We’ll see how that plays out.”

Aviva’s semi-annual report notes driving frequency in Canada is now almost back to pre-pandemic levels, leading to increased frequency and severity.

Aviva Canada reported an overall combined operating ratio (COR) of 91.7% in the first half of 2022 and organic premium growth of 6%. Aviva plc’s statement notes Aviva Canada’s COR in the first half of 2022 was up by 2.9 percentage points over the same period last year due in part to “normalised motor frequency.”

Ontario’s post-election government re-introduced budget measures yesterday aiming to cut down auto insurance premiums for consumers. Canadian Underwriter asked Storah for his views on the ideal way regulators can help insurers make this happen.

“The best thing most regulators can do is allow insurers to flow through the rates that they need so that insurers can feel good about [the auto insurance] business they’re writing today, knowing that [their auto claims] costs are going up in the future [i.e. due to inflation],” Storah said.

Secondly, “regulators can help take cost out of the system,” Storah said. “What I mean by that is cost wastage. Inflation is something that everybody understands, but there’s cost wastage in the system because you have unregulated parts of the system — whether that’s healthcare providers, whether that’s tow truck providers — you know, we just need to control their costs.

“And then the regulators should expect and demand that insurers pass those cost savings and reductions through in their rate indications and ultimately through to consumers.”

Feature photo courtesy of iStock.com/Kiwis