Impact of Inflation on Insurance and Coverage Costs

“Higher inflation increases loss costs (the costs required to pay insurance claims). Traditionally, and quite simply, it will increase the rate,” Marsh said. . “But pricing itself isn’t the only answer. The reason is that we’ve been in a market where prices have gone up over the past few years, and the market won’t hold up as well.”

In the first half of 2022, Canadian commercial direct written premiums (DWP) increased 7% compared to the same period last year. All things considered, this was a “good result,” according to Marsh, but pales in comparison to his 22% increase in DWP in his first six months of 2021.

“We are definitely witnessing a significant downtrend,” he noted. “That 22% of him was heavily supported by last year’s rate hikes.

listen: Meet Rob Marsh: President of Liberty Mutual Canada

To combat inflation, insurers “need to be very aggressive about accelerating inflation. [their] “Understanding inflationary trends,” said Marsh on the impact of these trends on insurance pricing and reserves. To manage pricing and overall portfolio impact, most insurers focus on underwriting excellence and risk selection.

“This is more than just a pricing strategy,” Marsh stresses. “That’s what your portfolio looks like? What is diversification? How long is the long tail between first-party and third-party lines? How are they combined?”

The Liberty Mutual leader also noted that government figures are often slightly behind what’s actually happening, which is evident in the discussion of daily claims.

Commenting on how Liberty Mutual is dealing with inflationary pressures with its broker partners and clients, Marsh said: .

“Because this is a global issue, we have made it a priority to have these conversations, leveraging resources not only in Canada but around the world. Ultimately, many of these trends are global in nature, and your ability to navigate will depend on many other factors.

Read the following: What brokers should do in a tough insurance market

Marsh explained how inflation affects insurance company balance sheets. He said when interest rates rise, insurers typically hit their investment portfolios. This goes against the common assumption that rising interest rates lead to better returns for insurance investment portfolios.

“Ultimately, the two avenues required to achieve a return on capital are securing profitability or securing a return on investment,” Marsh said. “When we see inflation pick up like this, especially at the speed of it’s operation, we’re really doing a pretty big hit to our investment portfolio – everything we already own – we’re Because we typically invest in much more conservative financial instruments (bonds, bonds, etc.) because of the nature of our business and our need to hold capital…we don’t just do it when a claim comes. It is also a result of the regulatory environment that needs to be done.”

It’s been almost 15 years since the financial crisis, but the industry has experienced a “very stable period,” according to Marsh. Interest rates were around 4% when the financial crisis hit in 2008, but since then interest rates have dipped below 1% and in the last 15 years he hasn’t risen above 2%.

“We were able to manage it. We were able to see where we were going, especially in the long tail business area,” Marsh said. “But the amount of volatility we experienced and the base point increase that occurred in the months and quarters that followed – that pace due to high inflation was really [the industry’s] Balance sheet under stress. This has a huge impact on available capital in the market.

“Generally speaking, as an industry, we entered 2022 in a fairly stable place. Seeing the hundreds of millions of dollars lost as a result of the change, it’s really worrying. [create] You will no longer be able to invest in the same way you planned this time last year when you were planning for 2022. “

Going forward, insurers will focus on portfolio diversification, risk selection and underwriting excellence, Marsh reiterated. He added: [and how to] Distinguish one risk from another. No two risks are the same. Sometimes there is a lot of rigor associated with that differentiation. ”