Where Canadian insurers are feeling the pinch of inflation

The insurance industry has not been immune to these challenging macroeconomic trends. In particular, insurers are feeling the pinch through auto physical damage inflation, which is running significantly higher than Canada’s consumer inflation rate.

“We’ve all seen how hard it is to get a new car, how expensive it is to buy a used-car compared to [pre-pandemic], and the wait times for both are significantly longer,” said Jason Storah (pictured), CEO of Aviva Canada. “When you add the supply chain pressure of rental companies not having the same number of cars available that they used to, and the fact that customers’ cars are in body shops taking longer to get fixed, it’s clear to see the really pronounced spike in inflation coming through in auto physical damage.”

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As of August 2022, Aviva Canada hasn’t seen the same spike in bodily injury inflation, which is partly due to court-mandated caps on damages. The Supreme Court of Canada imposed a maximum amount of damages recoverable for pain and suffering in 1978, which has increased over time with inflation and is now equal to approximately $414,689. Some provinces also have minor injury caps or deductibles, limiting the amount a person can claim for minor injuries arising out of motor vehicle accidents.

“I do think we’re going to see inflation trickle into that part of the business, but not with the same spike that we’ve seen in auto physical damage,” Storah told Insurance Business.

Statistics Canada reported that the homeowners’ replacement cost index increased by 10% year-over-year in June, following an 11.1% yearly increase in May. Generally, property inflation has moved about in line with CPI, according to Storah, but he did share the following warning: “We’re in the middle of catastrophe (CAT) season. It wouldn’t take much in the way of CAT activity to create a spike where, all of a sudden, there aren’t enough roofing contractors or builders to go around. That would cause acute pressure on property inflation.”

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In 2021, Aviva Canada established an inflation taskforce to analyze different scenarios of inflation and the impacts they could have on the business. Storah explained: “We focused on: What might happen to our underwriting margins? What might change in consumer behaviour as affordability becomes an issue? What might happen to claim trends with inflation, reserving, frequency and severity?

“We’re always managing our cost basis of business […] being cognizant of where our expenses are going and how we’re managing inflation. One very topical area at the moment across every industry is wage inflation, so we’ve modeled a few different scenarios and we’re looking at the market. There are a lot of eyes within Aviva on the different scenarios around the economic outlook, whether that’s recession, inflation, the housing market, the construction industry, or any one of our segments.”

This is a “complex operating environment,” according to Storah, and one in which Aviva Canada’s broker partners play a critical role. The CEO explained: “We have fantastic broker partners. Collectively, they play a very important role in helping consumers understand [the market and economic pressures] and what’s happening with their insurance premiums, while also putting them at ease around some of the challenges they’re facing and their concerns about recession. That broker role is going to be even more important in the second half of the year as these trends continue to unfold.”