Canada’s year-over-year inflation rate was at 7.6% in July 2022, easing from the 39-year high of 8.1% recorded the month prior. The impact can be seen in the skyrocketing costs of necessities such as groceries and gasoline, and in much larger commodities and services including the raw materials market and Property & Casualty industry. The record high inflationary period we are in has made it necessary for insurance brokers and agents to revisit their risks to ensure that their clients are adequately insured. A condo board having a professional 3rd party insurance appraisal completed safeguards the property from this risk.
Celyeste Power, executive vice president, strategic initiatives and advocacy at the Insurance Bureau of Canada (IBC) said, “You want to verify that your commercial property insurance coverage reflects the correct valuation, given replacement costs may have increased due to inflation … What we found through the hard market was risk mitigation and management is critical to ensuring a long-term, sustainable insurance scenario for any consumer.”
Bernard McNulty, chief agent and head of claims, Allianz Global Corporate Specialty added, “Typically, [in] our property coverages we see a modest annual increases in values … So, most brokers and clients would typically adjust in the range of 1.8% to 2% annually for increased values to reflect increased construction costs if they lost a building.”
But more recently, new baseline values have been reported to have increased 8% to 16% year-over-year. “Previously, it was a little bit more to do with how the valuations were being determined, whereas now it’s just the true cost of reconstruction,” he said. For this reason, having an insurance appraisal done by a specialist will ensure that your building limits reflect current construction costs.
The Covid-19 pandemic caused a nationwide supply and labour shortage which had largely negative impacts on the construction industry. Increased health and safety protocols slowed down construction sites, and costs for raw commodities such as lumber, iron-ore, and concrete went up significantly. The Producer Price Index (PPI), which measures the average prices Canadian producers receive or pay for goods, has outpaced the rate of inflation, showing a 11.9% year-over-year increase in July 2022.This is coming off an all-time high in May of 2022 where the PPI had reached 132.6 points. The key take-away is that although inflation is still hovering around the 7-8% mark, other factors related to constructions costs including costs for materials and labour are driving replacement values even higher.
The commercial insurance industry has entered a transitionary stage where the hard market is showing signs of stabilization, however rigorous underwriting conditions are expected to persist. Emerging issues such as rising inflation, supply chain disruptions, catastrophic weather, and increased cyber risks during the pandemic are some of the factors preventing the return of a soft market. In 2021, the surge in natural disasters caused by global climate change alone had brought the average annual cost of claims for property damage to $2 billion. As a result, insurers are paying special attention to risk quality in an effort to mitigate their losses.
Ensure you are adequately protected
Given the volatility of construction costs, and the record-high inflationary period we are in, it is essential that your property is adequately insured. We have seen cases where properties have been underinsured, exposing themselves to unnecessary financial risk and liability. Having an insurance appraisal done on an annual basis, by experts trained in local construction costs, will ensure that you not only have sufficient coverage, but that you are paying the right premiums.