An actuary explains why rates are actually going up

There’s no single reason why rates in property and auto are on the rise, but falling behind on trends will only trap your brokerage farther in the past, an actuary warned.

Deb Upton, senior director of actuarial services with Gore Mutual, explained the confluence of factors – ranging from inflation to regulation to data – for increased rates at the company’s Fast Forward event in Toronto recently.

Climate change

The rise of catastrophic events in Canada is the result of climate change, Upton told the audience as she showed pictures of the Fort McMurray fire, while also discussing other major events like the 2014 Calgary floods and this year’s Hurricane Dorian. But, she added, there are many smaller ones that don’t get many headlines, like the windstorm that hit Ontario last year.

“Hundreds of millions of dollars in damage in just four hours of wind. This stuff is happening all the time and of course it’s driving prices up,” she said.

Data

Collection of more data has proven to be a pain for consumers but that will ease, according to Upton. Today’s insurance model where the good drivers subsidize the bad drivers will change.

“Over time, insurers recognize that the more information that we had about somebody, the better of a job we could do assessing the risk they actually represent on the portfolio. This is really disruptive in the short term – this is where you’re getting a lot of the dislocation – but it’s a win for the customer. No individual wants to knowingly subsidize somebody else.”

Inflation

Inflation is playing a big role in why rates are changing. “Medical inflation, namely, affects auto and it moves up and down depending on what new treatments are available,” Upton explained.

Another is inflation in the construction sector where her claims teams reported costs in this area are up 8% per year. “That’s phenomenal, people. That’s incredible. That’s unlikely to decrease and that’s obviously really driving prices up.”

Interest rates

As a major cash flow component for an insurer, interest rates are playing a significant role in insurer profitability – or lack thereof. Gone are the days when interest rates were so high that insurers could lose money on the underwriting side and still be profitable, Upton said.

“We could lose money and nobody even cared because we made so much money on the investments; just holding the premiums and getting the returns,” she said. “That hasn’t been true in 10 or so years. I think we’ve been at historic lows for such a long time [and] there isn’t an outlook that says that’s going to change any time soon. So, unfortunately, prices go up.”

Government regulation

That a number of carriers are foreign-based means they not only have to deal with regulations here in Canada, but also in their home countries.

“What that means is [you see] a variety of different ways to approach reinsurance and perils like earthquake and flood,” Upton said. “Not everybody is doing the same thing. Over the last 10 years, globally, there’s actually been lots of changes in solvency regulation. What that really does is drive pricing changes that are, frankly, completely unexplainable to us, much less the client.”

Legal

Let’s say there’s a case that goes against the insurer. “Usually what happens in those cases is that prices have to go up to cover claims we weren’t expecting to see,” Upton said.