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Inflation’s Impact On Insurance – Extended Edition

Inflation’s impact on insurance – extended edition

Inflation’s Impact On Insurance

February 15th, 2023

Since the global pandemic began in 2020, inflation has been at an all-time high causing major challenges to the insurance industry as well as our valued clients. The price of goods, labour and interest rates are all on the rise, causing stress to not only us, but to our economic system. 

Labour Shortages 

Over the last few years we have seen labour shortages in nearly all sectors across the insurance industry. This includes various roles such as an insurance adjuster, insurance appraiser, and customer service positions of all types. These shortages have led to struggles during the insurance claim process, causing delays and an overall increase to insurance companies’ costs – which leaves our clients (at times) frustrated.   

Take for example if a homeowner suffers damage to their house, and there are limited contractors available to make such repairs. This would increase the overall price of a claim. If a vehicle is in an accident and the driver requires a rental vehicle for temporary use, the price is increased due to demand – given that there is limited supply. 

Price of Goods & Services

Common areas of increase include the price of gas, grocery items and transportation needs, such as a tire replacement on your vehicle. Many of these issues stem from increased demand on high-priority items and materials amid a slowdown in production, and lack of availability in pandemic-related closures.

Following a shutdown once an industry has resumed their normal operations and increased production levels, consumer demand for certain items has continued to outpace inventory. In response to these supply chain concerns, the cost of such items have skyrocketed across industry lines, this contributing to our inflation issues.

An insurance policy is put in place to protect items that require goods to construct – wood, aluminum, windows and doors, tires, glass, steel etc. When these goods are vastly increased and a claim is submitted, the valuation of such loss is increased accordingly.

Residential Home Insurance

In the Canadian insurance industry, the typical replacement limit on a building or home by inflationary factors is 2-5% per year. However, over the last three years we have recognized that true inflation values far exceed the increase proposed on an insurance policy. This is disrupting the insurance process where many policies are underinsured and undervalued. When a loss occurs, the limit of an insurance policy does not adequately support the loss and therefore does not fully pay for the cost of repairing or replacing such item(s).

Within a residential homeowner’s policy, the coverage may include a guaranteed replacement coverage endorsement, which provides protection to a client if the limit of coverage does not match the true replacement valuation. This guaranteed replacement provides the peace-of-mind in knowing that in the event of a catastrophic loss, your home will be rebuilt to the same standard of construction, with materials of like kind and quality, regardless of the value declared on your policy (subject to the insurers’ terms and conditions.) When a guaranteed replacement coverage policy is issued, the responsibility which follows is to complete and remit a home evaluation every few years to an insurance company.

If your policy does not include the guaranteed replacement coverage, it is likely to be provided on an actual cash value or a replacement coverage form.  In this event, it is critical to make sure the amount is sufficient to rebuild your home should it be involved in something such as a total loss. Actual cash value policies pay the depreciated value that the policy is insured for, and accounts for life expectancy and depreciation of the insured item. If that amount of coverage is not sufficient, a policy holder becomes a participant of the loss and would need to pay for the difference in cost. It is a good idea to check with your broker whether this is available on your policy. Guaranteed replacement cost means your insurance company will pay the full replacement cost to get you back in the home (or even cottage) which matches what you had prior to your loss, regardless of cost.

Automobile Insurance

In Ontario, an automobile insurance policy is designed to provide coverage to support the repair or replacement of an owned vehicle, in addition to the liability of any negligence on the road and/or injury support in the event of an accident or claim. Over the last few years we have recognized many effects of inflation on an automobile insurance policy, whereas claims have been significantly increased. 

In the event of an automobile accident where a passenger sustains injuries, many of these costs are supported and paid by the insurance company under the accident benefits portion of a policy. This includes doctors, rehabilitation specialists, physiologists and other professionals included in the medical system. Due to labour shortages and prices of services, such expenses have risen and increased the overall cost of claims. The accident benefits coverage is designed to provide statutory coverage to all Ontario residents with many options to increase the coverages that are available. Due to rising costs, it’s recommended that you review your coverages and consider an increase.

In the event of an accident where an owner of a vehicle is negligent in causing injury, harm or loss to that of a third party, and such damage surpasses a specific threshold, a bodily liability claim can be produced. Due to inflation and the supply chain, we have recognized the number liabilities claims and payouts have significantly increased. It is our recommendation that you increase your liability coverage in accordance with this economic shift.

If you have any further questions or would like a detailed policy review to be completed, our team is here to help! Please don’t hesitate to reach out to our insurance professionals for all inquiries. Contact us now.

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