Improved capacity among insurers should help stabilize rates and help the industry emerge from the tough commercial insurance market that has hit several business segments since 2018.
In its most recent quarterly report on the state of the commercial insurance market, the Insurance Bureau of Canada (BAC) observes a certain stabilization of premium increases in this segment of property and casualty insurance, despite inflation, disruptions in the supply chain and geopolitical risks.
In the last quarter of 2021, the average premium increase was 9.23%, the same as a year earlier.
Cybercrime remains a problematic segment with a combined ratio of 142% in 2021, despite rising rates. The market will remain tough in this market due to supply issues, rising ransom demands by hackers, and regulatory changes in privacy protection.
BAC has seen an increase in computer attacks since the start of Russia’s invasion of Ukraine in late February.
In commercial property damage insurance, the high inflation of reconstruction and material costs, as well as the scarcity of labor which extends the duration of construction sites, are all factors that contribute to the constant increase in rates.
Inflation in Canada reached 5.7% in February 2022, compared to a year earlier. For example, the price of lumber is increasing due to high demand and extended delivery times due to busy modes of transportation.
The same situation occurs for parts for new vehicles and heavy machinery, where the supply chain is overwhelmed by demand. The war in Ukraine is also fueling higher fuel and energy prices in general, contributing to general inflation.
Insurable values are on the rise due to this inflation, which also fuels the rise in premiums, even if insurers have no control over it, recalls the BAC.
Effect on premiums
In commercial insurance, the underwriting of a building is determined by four characteristics: construction, use, coverage needs and risk exposure. The rate is then multiplied by the value of the building to be insured.
For example, a rate of 10 cents per $100 of coverage limit represented a premium of $5,000 for a building with coverage limited to $5 million.
The constant rise in reconstruction costs is prompting insurers to increase this rate to 20 or 30 cents per $100. As the new rate applies to a rising value, the premiums go up noticeably.
In the third quarter of 2021, in personal home insurance, inflation in reconstruction costs exceeded 14% in one year, while the consumer price index had climbed by just over 4% and insurance premiums by 5% during the same period. Although the data is not available for commercial real estate, the BAC points out that these inflationary pressures apply in the same way to the insurance costs of this segment.
The BAC suggests a few ways for companies to reduce the pressure on their insurance premiums, based on the four pillars of the ERM (enterprise-wide risk management) method: financing, operations, strategy and risks.
Every business must consider the various risks that can negatively impact these activities and determine ways to finance damages if they occur, through deductible amounts, warranty limits and captive policies. Thus, the company can choose what it insures and the level of risk it is willing to assume on its own.
In one year, the number of calls made to IBC’s business insurance help center has decreased by 14%, from 691 calls for help in 2020 to 591 calls in 2021. If we compare the volume of calls received in the last quarter of the year, the drop is 39% in 2021 over the previous year.