Inflation and higher interest rates may alter P&C market

A one-two punch delivered by inflation and the resulting interest-rate increases could have several impacts on Canada’s P&C sector, including on claims costs, expense ratios, investment returns and the continued viability of the current hard market.

Nearly all major industrialized economies are now wrestling with record or near-record inflation, due largely to supply chain disruptions and surging demand as national economies rebound from COVID-19 and other issues.

Earlier this year, some economists called for Canada’s inflation rate to peak with March’s 6.7% rise. But it’s since been outstripped by April’s 6.8% increase, May’s 7.7% hike and the 8.1% year-over-year rate reported in June. The most recent rise was driven largely by skyrocketing gas prices.

“The key takeaway from April’s CPI release is that inflation is spreading much more broadly, and at clear risk of getting firmly entrenched,” wrote Bank of Montreal chief economist Douglas Porter in a report following StatsCan’s April data release. He predicted inflation of more than 6% will continue throughout 2022; other economists worldwide have corroborated this view.

Rising costs of doing business, beyond claims costs, coupled with an already tight labour market that’s putting pressure on salaries, will also affect P&C industry profitability.

Plus, it’s still not yet clear whether the high price of gasoline and diesel will cause clients to drive less and positively impact claims costs for personal and commercial auto.

Several P&C industry observers believe overall upward pressure on business costs will be passed on to insurance consumers, extending the hard market into the foreseeable future. We’ll have to wait to see how it all impacts the industry’s various moving parts.

Escalating consumer prices may also translate into social inflation.

“There’s quite a distinction between the impact of…first-party inflation: the cost to replace a building or to replace property…and the other side of that equation in the insurance business, which is the effect of social inflation,” said Bernard McNulty, chief agent and head of claims at Allianz Global Corporate Specialty.

But, on the consumer side, larger awards are happening, mostly in the personal injury field, said Ian Gold, partner, Thomas Gold Pettingill LLP.

“People suffer a loss, and whether it’s their fault or not they think they’re entitled to recover money,” he added. “Everything that they’re asking for is driven by the cost of things, including inflation.”

Expanding social inflation could ultimately lead to premium hikes by insurance companies and spur them to work to improve their investment returns and build reserves, Gold said.

Firms also must consider long-tail liability claims.

It’s not uncommon for a basic slip-and-fall claim that includes bodily injury to be open for three, four or five years, said McNulty. But a claim evaluated and reserved for in 2019 will now be impacted by both economic and social inflation in terms of a court award.

This article is excerpted from one the appeared in Canadian Underwriter‘s June-July issue and includes files from Philip Porado. Feature image by iStock.com/aluxum