As prices rise, Paul Martin and Colin Rooke discuss the impact of inflation on the insurance industry.
Listen to the full episode here, or read the full transcript below.
Paul Martin:
Welcome to Risky Business, commercial insurance with Butler Byers and your expert with us today, Colin Rooke, commercial risk reduction specialist with Butler Byers. This is Paul Martin, the host of this program, and thanks again for joining us. Now, Colin, we’re going to maybe switch subjects and talk primarily a little less about insurance, more about economics, but boy, they are intertwined, and the topic that keeps getting all the attention these days is that of the big i-word, inflation. Prices are going up, you’re seeing right across the country, economists are telling us that’s going to trigger interest rate hikes, which will add cost to businesses, but will inflation itself have an impact on the insurance industry? I mean, end of the day, insurance is a financial product. So my guess is, yes, there is an impact. Can you walk us through that?
Colin Rooke:
Yeah, absolutely. So I think everyone’s aware that we’re seeing the highest rise in consumer prices since the early nineties. Well, you listen to any news or any web browsing, you’re sure to stumble across it, and it’s what everyone’s talking about, from the grocery store bill, right to appliances. And unfortunately, so we’ve spent a lot of time talking about, on this show, the hard market and a few episodes ago, we reported that, hey, the insurance companies are now profitable, meaning that the sharp pricing increases that we’ve seen over the last three to four years, frankly, has worked, and we talked about, we’re not necessarily expecting a softening of the market, because this was a long cycle and the insurers are not going to soon forget the spot they’re in, but certainly we’re seeing the rates level out, which is great news.
However, then we start using the i-word, inflation, and so how is this going to impact your policy? Well, just because the insurer isn’t raising the rate you’ll pay for example, every dollar in sales or every dollar in equipment owned or building values, et cetera, now what we’re having to do is re-look at the value of your building, the value of your inventory, having conversations about business interruption, with supply chain shortages, something that may have taken you 12 to 18 months, for example, new piece of equipment, now might be three to five years, so it’s a big issue, and it is unfortunately going to impact, yet again, the cost of your commercial insurance program.
Paul Martin:
So you’re saying that the hard market cured itself a little bit, and just in the nick of time along comes the next problematic challenge that business owners, in their pursuit of insurance coverage for their commercial operations, are going to be facing yet another hill to climb and saying, “yeah, we got through one, but there’s another one right in front of us.”
Colin Rooke:
Yeah. Absolutely. Again, over the last three to four years when you’re having the renewal conversation, it’s a lot around the rate, so it’s just the number applied to what you have, and so you say, the issue here is, the rate is going up, they need more rate to ensure your company. And we always skim over… Oh, and by the way, they’ve added 2% to your building equipment stock, just to keep up with inflation and most clients are totally okay with that, “yeah. Well, that’s about the rate.” We now going back to say, “look, it’s no longer 2% a year, it might be four or 5% a month.”
You really have to go back and say, “you’re selling your goods at a higher amount, that means we’re now going to have to really look at ensuring your goods for a higher amount”, and traditionally, depending on the industry, all things being equal, meaning your inventory’s totally static, as an example, you would really only look at increasing the value of your equipment or stock at renewal or leading up to renewal, but now, we might find ourselves in a position where we might have to reevaluate every 90 days depending on basically the rate of inflation, and so it’s not something that we’ve really had to do in quite some time.
Paul Martin:
That’s an interesting point, if you think about it. Most of us are conditioned, I think, probably the industry is conditioned to an annual renewal rate. You’re saying that, “be ready, this is a potential change that’s coming.” Did we see that in the high inflation environments of 30, 40 years ago say where the policy was in place for a year, but the rate was reviewed every three months or something.
Colin Rooke:
Well, it wouldn’t necessarily be the rate, but it’s the value of what you have. So if you look at, for example, the lumber industry, in six months, the cost of lumber has gone up three times. Well, anyone that didn’t say, “geez, I better adjust the policy limit for the lumber inventory I carry to reflect, again, rapid increase in pricing”, you could find yourself in big trouble in the event of a claim, and so, it’s not as much the insurer saying, “we need to make more on those goods” It’s the, “do you have the right value internally in this case?” However, that’s not the case for other lines of coverage, like commercial auto, which we’ll talk about shortly.
Paul Martin:
Yeah. I get it now. I think you’re saying that, if your balance sheet is changing, you probably need to be reviewing how much coverage you have, because these two should be moving together in lockstep. So if your inventory values are going up, you better be talking to me because we probably need to make some changes so you don’t get capped out or short changed if you do have a loss.
Colin Rooke:
Yeah, absolutely. A normal thing, again, to use the lumber example, if you traditionally always had, let’s say, a million dollars worth of lumber and you bought an additional 500,000 worth of lumber, you would call your broker and say, “Hey, my inventory level has gone up by 50%. I want to make sure I’m covered”, but in your mind, if you still have the same amount of lumber, but the cost to replace that lumber keeps increasing each and every month, what is not happening in this industry is, the conversation with the broker to say, “I haven’t necessarily purchased any more pieces of wood, but the value of that is shooting through the roof. Do I have to increase this limit?” And the answer is, “you probably do actually.”
Paul Martin:
Yeah. It’s a good reminder for everyone in business, I guess, that, if the product you have on hand is changing price, you probably need to be having a conversation with your broker, and as you say, I still have the same number of board feet, the number of pallets in my yard, but they’re way more valuable now, and we’ve seen that in really, I mean, even things like grain, I guess, have gone up dramatically, we’re seeing all the commodities that Saskatchewan produces going up in value, so this is probably not as much an aberration as the average person might think. It’s probably the norm these days.
Colin Rooke:
Yeah, absolutely. And I mentioned commercial auto. Now that’s a little different, because if you think about it, if anyone’s tried to purchase a new vehicle lately, there’s not exactly a lot of inventory lying around and really there’s no more deals. I mean, if you’re able to pay MSRP, you’re winning at this point and we’ve got often people paying 30, 40, 50% more than MSRP. Now, if you’ve tried to repair an existing vehicle, you’ll have noticed that depending on what the part is, again, significant delays, well, where that’s going to impact the business owner and frankly, in this case, the individual is, it will come down to rates and it will come down to, again, overall values, if it’s costing you more to get the vehicle, it’s costing you a lot more to fix the vehicle, and if you think about it, your 2004 Mitsubishi Lancer that was worth $5,000 three years ago might be worth 20 today, and so therefore in the event of an accident, just more money is being paid out.
Paul Martin:
Well, you’ve opened a kettle here, a kettle of fish for us to explore. We’ve got to take a little break though. We’ll come back and we’ll dig into that part just a little bit deeper. You’re listening to Colin, the commercial risk reduction specialist with Butler Byers Insurance. I’m Paul Martin. This is Risky Business. We’ll be back after this break.
Welcome back to Risky Business commercial insurance with the Butler Byers and the man who guides us through this on an ongoing basis is Colin Rooke, the commercial risk reduction specialist with Butler Byers. Colin, just before the break, you were talking about the auto industry and everybody’s cognizant, I think, of the delays and the backups in the auto industry. I notice that automotive dealers now have even changed their language.
They don’t invite you down to the showroom anymore. They invite you down to place your order, custom design your vehicle, and it might come sometime, but they’re just that far behind, and so, that’s an issue between buyer and seller, but you’re saying it’s also an issue in insurance and the implications come through, and it’s like an example of what can happen in any industry line if you’ve got these kinds of imbalances between supply and demand, it starts to impact price, it impacts service levels, it impacts everything and business owners can protect themselves or should at least have the conversation, so they’re cognizant of the challenges that’ll be facing.
Colin Rooke:
Yeah, absolutely. So when it comes to cars, again, the declared value is an issue. If you buy a truck for $75,000, it wouldn’t be unreasonable to say, well, five years later it might be worth it, $45,000. Well, now you buy a truck for $75,000, five years later, it’s worth $85,000, and so you got to make sure, again, “do I have the right coverage limit?” But from a budgetary perspective, one, again, if you are in an accident, talking about commercial auto, the cost to make you whole has increased dramatically across absolutely every type of vehicle, anything with a motor, for example.
And so values are an issue, but we are going to, in my opinion, start to see more rate on the personal auto and certainly the commercial auto side of things, just due to widespread delays, vehicle shortages, part shortages, paint shortages, labor shortages, metal shortages, you name it. And so unlike commercial property, where I’m saying, they’re okay with the rate on your limit level, but you might have to increase the limit. In this case, we might be looking at a dual, the insurance marketing wanting more rate, and then also your limits are going up as well.
Paul Martin:
Well, economists will tell you that inflation is not just prices going up. I mean, that’s the byproduct of it, but it’s effectively the value of the currency that you’re dealing with is depreciating, your buying power is declining, that translates into higher prices, but as you point out, a vehicle price today might actually go up. So, the value changes, but the value doesn’t change at the same time, because, if I have a house today, it’s worth a thousand dollars and the neighbouring house is worth a thousand, two years from now, they’re both worth 3000.
I mean, the value relative to the other product is the same, it’s just the price is different. So that’s what we’re getting at here, I think is what you’re saying is that, this is an issue of purchasing power, and you need to be able to keep that in mind that, if a business owner is having challenges in the purchasing power of buying inventory or supplies, or hard goods like a vehicle, odds are, this is going to have an impact on your insurance too, and we need to include that even though it’s not one of the products you buy or sell.
Colin Rooke:
Absolutely. And it’s a little easier to pallet when you say, “I’m going to way overpay for a Ford Raptor, but I’d sure like to drive one”, and when it comes to the insurance cost conversation, there’s always shock and awe if it’s going up, and so at a high level, it’s just keep in mind that inflation is going to directly impact your insurance policy. Now, there are steps you can take to mitigate this as well, and that’s why I want to bring this topic up. One, it’s very important to have more regular contact with your broker to spend, especially dependent on which industries you are in to say, “how is this impacting me? Do I need to increase levels?” And so more regular conversation is really important.
I mean, something that is also very important would be a complete review of all the terms and conditions of your policy, and so, as part of our risk reduction workshops, we do do this. It’s part of the analysis, it’s part of the plan presentation, but it’s very important, now more so than ever, to understand all the limits and conditions of your policy so you can make the right choices or at least educated choices for your company, and then, again, very crucial, really look at property values. If you haven’t done a building valuation in a long time or even equipment in stock, I would highly recommend you do so. So, one, you’re aware of where you’re at now, but there’s a lot of great companies out there that will provide three years worth of inflationary updates.
So you pay once and then you have this trailer, so you’re very aware of, whether up or down, the value of your building and equipment and stock, and I would say, again, if you haven’t done it in a long time, make sure that gets done, so there’s no shortfalls. I mean, at the end of the day, your broker and the insurer, it really is guesswork. I mean, a lot of the time you’re just taking the opinion from the customer to say, “well, my inventory is worth this.” That’s why it’s important to have an expert come out and say, “it’s actually worth this.” And then, again, this all plays into proper risk management and avoiding claims altogether. So working with the company like Butler Byers to mitigate losses, avoid losses all altogether, contractually transfer those losses, so it’s less of a concern in the event of a claim, having a shortfall due to an issue like rapid inflation.
Paul Martin:
Strikes me as this is more than an insurance conversation. I mean, in an inflationary environment, and it’s probably good to re-evaluate certainly the largest assets that you’re carrying on your balance sheet on an ongoing basis, because that impacts the relationship you have with a bank, if you’re a borrower, I mean, this goes well beyond just insurance, doesn’t it? Let’s face it, everybody in business has a margin account of some kind, some sort of line of credit. If the value of your assets is going up, that should impact the value of how much you can access from a bank, for example. So this is more than insurance, insurance is really just in lockstep with other financial services that a business might use on an ongoing basis.
Colin Rooke:
Yeah, absolutely. I’m not suggesting that… The real point is, when thinking about inflation, think about your insurance as well, again, this is the topic everyone’s thinking about, and it’s really important to think the value of my goods, the value of my buildings, and how does this impact my commercial insurance program?
Paul Martin:
Well, Colin this has been very insightful. And, I think for most business owners, you probably deal with things like inflation in a mode of some frustration, because it’s hard to keep up and hard to swallow the price increases you’re being handed and figure out, “how do I transfer those on to end users?” And so it’s a period of frustration and you’re saying, “come in and talk to us, we’ll walk you through this, we can’t make the pain go away, but we can show you how to deal with it. And we can show you how to take really an educated or an informed position on this so that you can sleep better at night, that you know, at least you’ve got this part in hand.”
Colin Rooke:
Yes, absolutely.
Paul Martin:
You’ve been listening to Colin Rooke, commercial risk reduction specialist with Butler Byers. I’m Paul Martin. Thanks for joining us. This is Risky Business. Join us again next time.