How inflation is affecting small business owners and carriers

Although inflation cooled to 4.4% in April from its high of 8.1% in June 2022, it’s still affecting small business owners and insurers, an executive at Hartford Steam Boiler told Canadian Underwriter.

From a carrier perspective, claims costs are increasing in the property market, largely due to the increased cost of construction and building supplies, along with supply chain challenges.

“All of those things sort of come together and make it really much more expensive to resolve a claim situation,” said Mike Bond, senior vice president of innovative risk partnerships at Hartford Steam Boiler.

And because data is constantly changing, it can be difficult to price the line of business.

“I think insurers are having a hard time keeping up with those costs,” he said. “I’ve seen some examples where insurers have been thrown out of markets because it’s impacting performances significantly.”

To get pricing right, a lot of carriers are focusing on insurance to value. “What I’m rating against from a value perspective on the property side needs to be accurate, so I think [insurers are] trying to get better tools and [improved] accuracy of that rating.”

But that improved accuracy comes with an increased price for the insured, who is already feeling the impact of inflation on their bottom line.

“They may have less revenue to allocate towards the expense of insurance, and yet the prices are getting higher,” Bond said.

Carriers can take measures such as increasing deductibles or changing terms and conditions, “but then are you providing the kind of protection that you really need to that small business owner?” he asked.

“I think we’re starting to see carriers get their arms around dealing with what will likely be a longer-term increased inflationary environment and it’s going to be difficult for all parties to work together in this environment.”

Consider how the cost of building supplies like lumber jumped dramatically a couple of years ago. “It was something that [insurers] hadn’t prepared for. So, all of a sudden, pricing was really inadequate for trying to resolve these claims.

“But as quickly as it went up, it feels like the cost of lumber has come down,” Bond said. “In a highly regulated insurance environment, you’re going to import a rating…to try to cover some of these costs.”

Add in the increased frequency and severity of storm activity — knowledge carriers didn’t have when pricing based on historical data — and the situation becomes “very challenging,” Bond said.

Small businesses continue to struggle with inflation and other economic issues in the post-pandemic environment.

“Carriers on their own are struggling with obviously the same economy issues, inflation, a difficult reinsurance market, pricing and capacity challenges,” Bond said. “And things like cyber or [employment practices liability] and new exposure within the property side when you think about the impact of climate change.

“That can be a lot for a small business owner to consume.”

Feature image by iStock.com/Jirapong Manustrong