Why brokers still need to protect clients from inflation

Canada’s inflation rate eased to 4.3% in March, Statistics Canada reported on April 18. That’s down nearly a percentage point from February’s 5.2% and solidly below inflation’s 8.1% peak in summer 2022.

And, with inflation beginning to cool, P&C insurance brokers might think they don’t need to revisit clients’ coverages to make sure their assets are properly insured to value.

That would be a mistake.

“Where inflation is in the process of peaking, [this] does not mean prices are falling,” observed Yvonne Steiner, head of property at Zurich Canada. “Rather, it means that prices continue to rise significantly, but at a slower pace. We believe that this inflation will stay at elevated levels throughout 2023.”

One symptom of inflation is that it creates scenarios in which property clients are at risk of no longer being insured to value.

Brokers will be hard-pressed to ensure clients aren’t at risk of being underinsured when high interest rates and inflated replacement costs ramp up their property values.

“In an inflationary period, the cost to rebuild is going up and [materials] cost more,” said Russell Quilley, head of commercial risk at Aon. “You want to make sure you’re buying [enough insurance to cover] the inflationary number, to [cover] what is actually true [value].”

For brokers, the key is to stay in touch with clients and make sure their commercial property values accurately reflect their own individual increasing values, he said. Don’t just compare their assets’ values against those of clients with similar risk profiles.

“What this persisting inflation may mean is that some of our customers’ values could be underinsured, and an increase in the coverage amount may be required to ensure adequate protection of their assets,” Steiner added.

“We’re working with our customers, together with our brokers, to regularly review these exposure valuations and to try to help keep them up to date.”

The industry also needs to get better at passing down inflated values to consumers through increased premiums, said Mark Wiens, head of commercial insurance for NFP in Canada.

“We in the insurance industry have done a terrible job of understanding inflation,” he explained. “Let’s say inflation [is at] 7%. If somebody’s getting a 3% or 4% rate increase on their renewal program, technically they’ve gotten a reduction because we’re not even keeping up with inflation.”

The break-even rate for premium needs to be at the inflation rate, he added. Even if it may be difficult to explain to consumers, the P&C insurance industry needs to keep up with inflation.

“A simple pickup truck 15 years ago might have been worth $40,000 and now they’re pushing $100,000,” said Wiens. “[Inflationary increases have] to be pushed through the system as a whole.”

This article is excerpted from one that appeared in the April print edition of Canadian Underwriter. Feature image courtesy of iStock.com/Iurii Garmash