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How Inflation Can Affect Your Commercial Insurance Policy

How inflation can affect your commercial insurance policy


What is the connection between inflation and commercial insurance? Inflation drives up vehicle repairs and medical bills, forcing commercial insurance companies to pay out large amounts for claims. Small business owners will subsequently feel the pinch when their insurance policy renews.

While small business owners cannot prevent inflation, they can do their best to understand the causes of inflation and its effects on their business and the insurance policy that protects it. With that in mind, we’ll go over what causes inflation, provide a future outlook of inflation in Ontario and how small businesses can weather an economic storm. 


Defining Inflation

Inflation measures the increase in the cost of goods and services for consumers. There are various ways of measuring inflation

Statistics Canada offers the most well-known inflation metric, the Consumer Price Index (CPI). Ontario businesses and consumers can monitor this site to understand how the prices change over twelve months, which can help them determine if they need to alter their budgets.

While inflation is measurable, it does not affect Canadian businesses or consumers all the same way. Businesses with drastic supply chain issues will experience a greater impact of inflation than businesses that do not have to wait for supplies. Overall, when inflation increases, consumers face a higher cost of living. 


What Causes Inflation?

Supply and demand play a primary role in the cause of inflation, which is why businesses struggling with supply chain issues are impacted by inflation more than others. 

The pandemic is a notable example of how increased demand for goods and services creates a ripple effect that causes businesses to raise prices. As businesses closed their doors for health reasons, the demand for goods increased while the supply of goods decreased. 

As countries around the world scrambled to retain employees and increase their bottom lines to pre-pandemic standards, the war in Ukraine further set back the production of supplies. You might call it the perfect storm for inflation. The demand for goods and supplies grew faster than the supply chains could reasonably respond. 

As a result, central banks in various countries generally monitor inflation and take steps to control it. Nonetheless, it is difficult to forecast what will happen in the future, limiting banks’ ability to keep inflation down. 

Since the 1990s, the Bank of Canada has been striving to keep inflation at 2% to allow the economy to grow steadily and sustainably. 


A Historical View of Inflation and Deflation in Canada

Dating back to the 1970s and 1980s, inflation in Canada ranged between 8% and 13% per year. 

Nonetheless, the Bank of Canada has been successful at keeping the inflation rate at 2% per year over the last 30 years, which has helped keep the cost of living for Canadian residents reasonable. 

While inflation has largely risen, there have been short periods of deflation. While consumers enjoyed lower prices during times of deflation, businesses did not necessarily fare well. The value of goods and services declines during deflationary periods, thereby creating lower profit margins for businesses. 


The Economic Outlook for Canadian Businesses 

The opinions about the economic outlook for the small business sector range from expecting a mild recession to anticipating high inflation for a longer period. If inflation hangs around, interest rates have nowhere to go but up. 

According to Reuters, around 30% of small business firms predict sales will fall over the next year due to decreased demand and higher interest rates in the housing market. Just over 70% of Canadian consumers expect to experience a mild or moderate recession in the coming year. About half of those surveyed classified the severity and length of a potential recession as moderate. 

As for consumer spending, nearly 64% of Canadian consumers planned to decrease spending and increase savings to contend with higher inflation and interest rates. 


How Businesses Can Cope with Inflation Risks

A common strategy for businesses heavily hit by inflation is to automatically increase prices, yet such a strategy may be counterproductive. Rising prices will likely send customers to competitors. Businesses may find there are more effective ways of dealing with the effects of inflation. The following four strategies will help your business cope with inflation risks:


1. Operate More Efficiently

Discover ways to help your employees increase their efficiency. Furthermore, look for ways to create efficiency in operations and material costs. For example, a small investment in technology may yield significant savings by improving efficiency.

2. Adjust Cash Flows 

Rather than increasing prices for consumers, small businesses may consider taking smaller profits during times when cash flows are trending positively. Moreover, financial allocations may be adjusted to help pay off high-interest-rate debts more quickly.

3. Reassess Product Offerings

Form teams to assess your product offerings, and strategize by dropping less profitable products or services or outsourcing all or part of the operations. Other strategies may be to adjust the cost of certain products or services up or down, or partner with other vendors to lower operating costs.

4. Proactively Manage Risks

While there are many things a small business cannot control, they can help themselves by proactively managing risks. Commercial insurance companies can work with small business owners to maintain a safe workplace in order to reduce the number and cost of claims. This strategy will help reduce costs by keeping premiums down. 


How Inflation Affects Commercial Insurance Rates

Commercial insurance companies have concerns about rising inflation just as banks do. 

As the costs of materials and medical services increase, commercial insurance companies have no choice but to pay more in claims. The increased cost may have caused commercial insurers to raise premiums for small businesses, as they may not have capacity to incur rising costs without consequences. 

While inflation certainly impacts small businesses in the short term, it also has a lasting effect as investments take time to recover and regain their pre-inflationary value. Once the economy stabilizes, commercial insurance rates will subsequently stabilize. Until then, small business owners may be able to keep their budgets in check by shopping around for the best commercial insurance rates.  


Final Thoughts

Our licensed insurance professionals at Duliban Insurance understand what small business owners are up against when the economy works against their business goals. We are committed to helping small business owners keep costs and premiums down by educating them about how commercial insurance policies can work in their benefit. Contact us today to get started.


Additional Sources

  • https://www.statcan.gc.ca/en/subjects-start/prices_and_price_indexes/consumer_price_indexes
  • https://www.bankofcanada.ca/core-functions/monetary-policy/inflation/
  • https://www.bankofcanada.ca/wp-content/uploads/2010/06/longworthe.pdf 
  • https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/inflation 

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