Impacts of Inflation

Welcome to Risky Business, commercial insurance with Butler Buyers. This is Paul Martin, your host, and the business commentator on CKOM. Joining me today, Colin Rooke, the commercial risk reduction specialist with Butler Buyers. Colin, we have had a few themes that have come through this program over the course of time, but just watching what’s going on in the economy and the world today, I get a sense we’re going to have a new theme. And so, I’m going to toss it out there. You tell me whether or not I’m right or wrong. Is inflation a thing when it comes to insurance?

Yeah, it really is. Just like everything in Canada today the costs of goods are increasing at a rapid rate. And with that one of the industries that really has had a significant impact and frankly throughout COVID and continues to rise is the cost of construction. I mean, we can certainly talk about supply chain delays and just increase input costs. But if we’re just talking about a typical property claim where there’s damage to a building and this would be applicable to home insurance as well we are seeing the construction costs increase at an alarming rate. And the increase to building values is not keeping up with that. And so when it’s claim time and you say, “Okay, well, the cost to rebuild to my building is $3 million. I only have a limit of two.” We now have a significant problem.

And so we do have customers that are racing and this will be industry-wide, not unique to us, but you will have those that are very concerned about or in tune with construction costs reaching out saying, “I’m worried about my coverage. What do I need to do?” And as prices go up but that wouldn’t be the norm. And so if you’re listening to this show and thinking about it it’s time to review your limits and make sure that in the event of a loss, you’re not looking at a significant shortfall where you’re expected to self-insure that gap frankly.

Well, you raise a really good point because it’s one of those things we went through COVID, which was a slow-down period. And I’m guessing we probably did everything we could to conserve cash and who knows, maybe some people even cut back on their coverage and now we come out the other end and it’s like you’re on a steep slope upward and people are busy just trying to keep up. And they don’t ever think about, “Hey, I got to crack the insurance file and see what I’ve got in there.”

Yeah. And in fact, that makes this situation quite a bit worse. So on the one hand you might have said during COVID that I’m in a hard market. This is year three or four and my business has slowed. I’m not going to accept any inflationary increases. I’m trying to save costs wherever I can. I have less people working. I’m less insured. I’m less concerned about claims. So I want to make the following changes. And in some cases saying just due to cost reasons, I need to remove these coverages altogether. Well, now you fast forward and things are, for the most part, returning back to normal and customers are forgetting that businesses are forgetting that they may have removed coverages to save cash or decreased limits.

And then now we’re adding high levels of inflation to those limits. And if you’re not on top of that, if you’re not making sure you’re current with today’s pricing, that gap, I referenced using the building example now has widened. And to further quantify that, just giving you some background industry example, the rate of errors and omissions claims against brokers has skyrocketed. Now I’m not trying to say at all that the brokers are negligent, but anyone can claim that technically the broker made a mistake and those are on the rise. And it’s coming from people that reduced coverages and may not have remembered or agreed to increase those. And then now have subsequently had a claim despite saying, “I don’t want this.” And then they’re trying to put in a claim for those, and now we have a problem. So it is a big deal and it’s something that needs to be monitored.

Colin, this inflationary market I mean, it’s relatively new. And we’ve been experiencing significant inflation say for a year, but we went for a long, long time where this was not a part of a conversation. Now if you’re old enough and you’re in the tail end of the boomers or something, you probably remember that period of time 30 years ago when inflation was an everyday thing, and you just got used to it. We’re in a mode now where we have to train some people, don’t we? I mean the new generation of leader has not experienced this. And I’m wondering if you’re getting some of the old guard coming up and saying, “Oh yeah, I’ve been to this movie. Understand it.” And the new one saying, “What the heck’s going on here?”

Yeah. You are exactly right. You do get the old guard that says, “You know I’ve been through this and you just got to tighten up and weather the storm.” And you’re right. If you’re looking at a younger business owner, it’s really been very low-interest rates, low levels of, normal levels of inflation call it, status quo renewals. The hard market from our chair would be the biggest obstacle they’ve probably seen. And so you have to spend a lot of time educating around what’s happening now and the overall impact. And the problem too, I mean, we’ve talked about where we see the market going. And we did do a show early January to suggest that I don’t see a soft market coming but potentially sort of a plateau in the pricing. We might… I even said we’re starting to see some as-is renewals.

And so I have to change my tune a little bit. Because so yes, in 2021, it was a very profitable year to show that the increase in pricing was working and certainly the first part of 2022. However now with these inflationary pressures and the concern over global recession and the war we’re back to “Okay. Yeah. I might be able to do better on some investment returns, some loaning of the cash, but there’s still so much uncertainty around claims that now we are already, again, starting to see the insurance and certainly the reinsurance market tighten up as a precautionary measure to make sure there’s enough money to pay claims.

Yeah, it is sometimes what’s old is new again, but the inflationary experiences that we went through in say the ’70s and ’80s and that period, there was this bit of a correlation between interest rates and inflation rates. They were actually pretty close and you’re seeing central banks bring us back to that kind of position today. And we’re seeing interest rate increases that for anyone under the age of 50 I’m guessing it’s unprecedented and it’s got to rock them a little bit. Then I’m guessing they’re coming to you and say, “Provide me reassurance. Explain to me that this isn’t the end of the world here, that this is manageable. We can deal with this.” And when they ask you that, I mean, how are you responding?

It’s a good question. And really, on the one hand, it’s wait and see how this plays out and then on the other it’s and I say this all the time there still is something that can be done about this. You have to be the best risk. It’s well, twofold now. One, when it comes to claim time I mean if there’s a concern there that our limits are out of whack. Two, horrific delays in reconstruction timelines, and then three, putting pressure back to your underwriter or insurer to say, “Well again when you don’t feel like giving credits this company should be the one that receives those.” I mean they’re still there. They’re just hard to get. And again, it’s so important to show that we’re putting in the work here and that we deserve those.

All right, Colin, we’ve got to take a little break. We’re going to pick this up after a short commercial break. You’re listening to Risky Business commercial insurance with Butler Buyers. This is Paul Martin. Back after this.

Welcome back to Risky Business, commercial insurance with Butler Buyers. Paul Martin, your host, and joining me, Colin Rooke, insurance expert in the business reduction or the risk reduction specialist. Sorry, not the business reduction. I had that all wrong. Colin, sorry about that. You’re the risk reduction specialist at Butler Buyers. We’re talking about the impact of inflation. This is a new topic for us. And I just get a sense we’re going to be talking about this for a while aren’t we? I mean this is not just a passing gig. This is really changing the way you do the things. And I guess it’s simplest form it’s insurance is a financial product. Inflation is all about finances. So those two, they do live in the same house. And that’s why we’re talking about them at the same time.

That’s true and furthermore when we talk about available limits… So you have clients saying, “Well, I would like to buy 5 million, 10 million, 25 million liability.” Well, there has to be capacity in the market to be able to offer those terms. And the challenge we’re seeing now, with again rising inflation, is that when I thought the reinsurance markets were feeling better about reinvesting their cash back into the insurance market, now we have uncertainty around the cost of claims. And frankly the potential to loan money at very high-interest rates. And so not only are we not seeing a lot of new capacity entering the market, so again an influx of cash that is available to pay claims, we are continuing to see a retraction of that capacity. Because they’re saying, well, “This money is better served elsewhere and I’m not going to risk it in the insurance market.” And what that boils down to is higher cost to be able to purchase the limited capacity that’s out there.

That’s an interesting point because I guess if I’m in a reinsurer, which is the second tier of insurance, the insurance companies buy insurance too. If I’m a reinsurer and I’ve got a million dollars to invest, I got to make a choice. Am I buying risky policies or do I just buy US treasuries because there’s no risk associated? And guess what the interest rate on treasuries has gone up three points in the last little while, why wouldn’t I be taking that? So this is what you’re saying is when you buy a policy you’re effectively competing with the treasuries of countries now because all of a sudden their paper’s way more interesting.

Exactly. So when we were talking about this a year ago, there was no capacity because there was no money coming in due to loss ratios. And the hard market has corrected all that. Now they’re just saying, “I don’t think I can make money at this.” And so they’re limiting what they’re prepared to reinvest back into the insurance market.

And all of that does is just raise the price for the end buyer.

Yeah. And really so the end result of where we are at now with the economic uncertainty is frankly a complete change of the global risk index. So we talk about the top risks of 2021 and over the last five or six years, we’ve really documented the swift rise of cyber insurance. So now this is not just… So that study’s already been done. But this is call it an amendment to that study, just more of a take your temperature now update to it. And where it was pandemic and cyber one and two, we now have cyber four and pandemic five on that list. And the number one concern amongst business in Canada is a global recession. And so it’s really just accumulation of everything that’s happening and again the concerns around coverages and the concerns around rapid inflation.

So second to that is supply chain. So I mean I don’t think that’s really a shocker to anyone. I mean, I don’t think there’s anyone that’s having trouble with, or who isn’t having trouble with their current supply chain and then third is national catastrophes. So weather pattern changes, which is certainly on insurers’ and reinsurers’ radar as well. So I don’t mean to sound doom and gloom about where the industry’s going, but really I do want to stress that something can be done. And go through our risk assessment process, get to know your underwriter, allow us to represent you appropriately. And say again, they’re still writing business. They’re still trying to grow. It’s just so important they have the whole story in that your company’s reflected in the right light to the right few markets. And you still can win but don’t be the company that does nothing. Don’t accept status quo.

I guess you’re saying, “Look for three or four years cyber was number one. It just got knocked off the pedestal. Things can change and change rapidly.” And I’m guessing for a lot of people that in the commercial world, they buy their insurance, and they forget about it. Like you’re saying here, “Stay in touch with us. I need to be on maybe a little higher up on the Rolodex and that things can change. We can deal with them, but we need to be on top of those changes.”

Yeah, absolutely. I mean the way our risk assessments work I mean they change and certainly in the last two or three years, they are cyber crime heavy. But that’s because you look at well what’s keeping people up at night and where are the claims coming from? Where are the risk coming from? And so you’ve got to have that discussion or we wouldn’t be doing our job. And again, now it’s our tune is changing to proper review of limits and review of supply chain exposures. Frankly, something that I’ll call it an oldie but a goodie, disaster recovery planning has become a hot topic. Because again the old plan that maybe we worked on four or five years ago needs to be completely revamped because it’s probably not anywhere near accurate as far as getting back to business. And so that’s something that we’re talking about all the time.

Well, we just got to wind this up here because of time, but I think we’ll just close it off by saying this, you encourage business owners to reach out to you. You’d be more than willing to talk to new prospects and to your existing client base. Don’t forget about us, that these conditions are changing all the time and we need to stay on top of it. And that Colin is here to help you do that. Is that a fair assessment?

Yeah, that is. And hopefully, and I won’t promise anything ’cause I haven’t asked them, but we can get someone from… I’ve got a great relationship with Suncorp Valuations. We could have a discussion with him about what he’s seeing in the market and really put some numbers to this topic.

All right. I look forward to doing that. You’re listening to Colin Rooke, the commercial risk reduction specialist with Butler Buyers. I’m Paul Martin. This is Risky Business. Thanks for joining us. Talk to you next time.