Insurance and inflation: how they impact each other

You’ve probably noticed how inflation seems to touch everything—groceries, gas, and just about every business trying to stay afloat. But what might not be as obvious is how inflation is shaking up the insurance world. The insurance market is particularly sensitive to the economic pressures inflation brings. It’s driving up premiums and even leaving people underinsured without them realizing it. Did you notice an unexpectedly higher premium increase at renewal time? Here's why.

How insurance inflation affects the insurance industry

Inflation is making waves across the global economy, and the insurance sector is feeling the pressure just like everyone else. Rising costs are becoming a big concern for both insurance companies and their customers.

Canada’s inflation hit a 31-year high of 6.7% in March, and it’s got everyone feeling the pinch. But here’s the thing: inflation is hitting the insurance world even harder than the broader economy.

So, what’s the deal with inflation? It’s essentially a steady climb in the cost of goods and services, and its ripple effects hit all kinds of industries—including insurance. According to Insurance Business Canada, replacement costs for homeowners are up a staggering 13% compared to pre-COVID levels. On the auto side, it’s just as intense—new vehicle prices have climbed over 7%, used vehicles are up a jaw-dropping 34%, and rental costs have jumped 24%.

For insurers, high inflation often means higher claims payouts and higher operating costs, which inevitably lead to higher premiums for policyholders. Unfortunately, that leaves some customers struggling to keep up with payments, forcing them to either cut back on essential coverage or switch to more affordable policies.

So what's causing insurance costs to rise?

A big reason claims payouts are climbing is the spike in repair and replacement costs, especially in the automotive and construction industries. Inflation has been driving up the prices of building materials and auto parts, and supply chain disruptions have only made things worse. We will examine the factors driving the rise in insurance costs:

Shortages

Take the microchip shortage, for instance—it’s pushed up the cost of new cars and auto repairs, which, in turn, impacts insurance premiums. When the cost to fix or replace something goes up, insurers have to adjust, and unfortunately, that often means higher premiums for policyholders.

More claims

Auto insurance rates are directly linked to claims losses, which means when those losses go up, customers are likely to see higher premiums at their next renewal. And 2023 was a tough year for weather-related claims in Canada—there were at least 23 catastrophic events, breaking the record set in 2022.

With the rising number and cost of claims, insurance companies have to plan carefully. They look at their loss ratios—the balance between what they pay out and what they bring in—and adjust premiums to stay financially stable. Unfortunately, that balancing act often translates to higher costs for policyholders.

Higher costs

The cost of building materials and skilled labour has been climbing, and it’s directly affecting property insurance. Between 2017 and 2023, the cost of building residential homes in Canada rose faster than commercial properties. By late 2023, residential construction costs had skyrocketed by about 75% compared to 2017.

This sharp increase makes it much pricier for insurers to cover repairs or rebuilds, leading to higher claims payouts. And again, those higher costs often mean higher premiums for homeowners.

What higher inflation rates mean for your insurance premiums

Inflation can make a big difference when it comes to your insurance, impacting your premiums, coverage, and even how much you get from a successful claim. It’s something many people don’t think about until it hits their pocketbooks. Keep reading to find out more:

Auto insurance

With car insurance, you might notice your premium climbing year over year. One major reason? The rising cost of auto repairs. Parts and labour have become more expensive, and those costs are reflected in what you pay to keep your policy active. Even if you haven't filed a car insurance claim, your insurance company will still take these increased costs into account when calculating your premium costs at each renewal, just in case you ever do need to file a claim.

Home insurance

Home insurance is another area where inflation can sneak up on you. With the cost of construction materials and labour skyrocketing, it’s more expensive than ever to repair or replace damaged property.

Imagine you’ve filed a claim after a storm damages your home. While your policy might have seemed adequate when you signed up, inflation could mean the payout no longer covers the full cost of materials or labour needed to fix the damage to your home. Lumber, roofing, and other building supplies have seen significant price hikes in recent years, leaving many homeowners with a gap between what their policy provides and how much money they actually need.

Also, both homeowners and tenants need to consider their contents coverage. Your insurance policy limit may have seemed right at the time, but with the increase in inflation, should you have to submit a claim to replace your personal belongings, your coverage limit may no longer be high enough to cover the cost of replacing everything. If you haven't updated your coverage limits recently to match up to inflation, this could come as quite a shock.

How to minimize the effect of inflation

Inflation can have a big effect on your insurance, but there are steps you can take to stay ahead of it. The key? Regularly review your coverage with your insurance provider to make sure your policy keeps up with rising costs. This helps ensure you’re fully protected without surprises down the line.

Start by scheduling a meeting with your trusted insurance broker before your policy renewal. They can walk you through how current inflation trends are affecting your coverage and help you plan for any changes. Getting ahead of the process gives you more time to prepare.

During your review, have your broker go over your policy terms and conditions, paying close attention to exclusions and limits. Make sure your policy limits are high enough to cover potential losses. If you find any gaps in coverage or underinsurance issues come up, work with your broker to update your policy to ensure you’re fully protected.

Finally, confirm your auto and home insurance actually reflect how much your car and home are worth. Rising repair and rebuilding costs could leave you underinsured if you undervalue your car and home. A quick review now can save you big headaches later!

Contact BrokerLink today

Are you wondering how current inflation rates may be impacting your insurance premiums? Are you worried you may not have enough coverage to cover your home or car in case of a claim? Then, reach out to BrokerLink today. Not only can our trusted insurance brokers help you review your coverage and fill in any gaps you may have, but we can also help you find the best coverage for your insurance needs at competitive prices.

You can reach us by phone, email, or in person at any one of our locations throughout Canada. No matter how you choose to get in touch, a BrokerLink insurance advisor will be happy to assist you. We also encourage you to take advantage of our free online quote tool that can provide you with a competitive quote in minutes.

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