Many homeowners fear for what the year ahead may mean for their insurance rates. Also, potential homeowners are hesitating to take the plunge in the current market. We examine the potential effects of a recession on your home insurance, and narrow in on the factors most closely affecting the rise in home insurance premiums. Finally, we highlight home insurance endorsements that may help cut costs during the recession.
What are the Causes of a Recession?
Effects on Supply and Demand
Driven by a perfect storm of post-lockdown consumer demand, supply chain issues, product shortages, and soaring oil prices, many Canadians are feeling the squeeze nationwide. Demand-pull inflation occurs when growing demand for goods or services meets an insufficient supply. This drives prices higher, affecting everyone.
Recession Impact on Consumers
A report first published by RBC Economics, the following predictions were proposed:
- Higher prices and interest rates will reduce the average household’s purchasing power, weighing on purchases of goods.
- Prices for most items, outside of food and energy, will rise. Canada imports many household goods, such as food.
- Gasoline prices are the biggest contributor to annual inflation; however, the recent drop in prices is providing some relief to consumers.
- Labour shortages continue to push wage inflation higher, leading to rising input costs for goods and services.
Recession and Home Insurance: The Three Impacts
Experts have weighed in with predictions about spending and insurance costs for the coming year. Additionally, home insurance rates are expected to continue to rise across the country over the next year due to the following:
1. Inflation
Economists at Oxford Economics believe that households with high debt will be hit hard during a recession. They also believe those who own overvalued homes will also feel the effects. During the pandemic, homeowners saw their home’s value soar. Inflation has an effect on many factors related to recession:
a) Increases in home insurance rates in Canada
This is due in part to the popularity of variable-rate mortgages in Canada, meaning the amount of interest owed adjusts as the Bank of Canada raises rates.
b) Inflation and your home replacement cost value
Pandemic lockdowns stimulated a surge in spending on home renovation projects for many Canadians. Meanwhile, the frequency and severity of extreme weather events have increased demand to rebuild or repair damaged properties. Combine these factors with ongoing supply chain issues, labour shortages, and surging building material costs, and construction is more expensive than ever, with projects taking longer than before.
The impact of inflation on your home insurance isn’t just limited to a rate hike – you can also be underinsured due to the rising cost of replacing a home. This means the cost to replace your home may be higher than the original value quoted when you purchased the coverage. While this can increase your premium, it’s best to talk with your isure broker about coverage. Otherwise, you may have to pay thousands of dollars out-of-pocket if your house is damaged while underinsured.
Check with one of our isure brokers to discuss whether your policy pays out replacement cost value vs. actual cash value for claims. For more information about claims payouts, please click here.
c) Labour shortages
While causes, such as supply chain issues and labour shortages, continue to make repairs and replacements more expensive for home insurance companies, you can expect policy premiums to continue to rise.
So, how does all of this affect your premiums? While you may have enough coverage on your policy to pay for the kitchen repair, the unexpected inflation rate of these expenses comes at the expense of your insurer. And when claims become more expensive for providers to pay out, home insurance rates start to increase. That’s because insurance companies need to make this money back to remain profitable in the long run.
d) Home insurance endorsements to combat inflation
During these times of economic uncertainty, cost-cutting and savings are of the utmost importance for many of us. That’s why it is important to reach out to your insurer or isure representative to discuss your financial plans. Some providers offer special policy riders that act as protection from inflation:
- Guaranteed replacement cost coverage can ensure you’re paid out the entirety of your home’s replacement value, even if the claim exceeds the limit on your policy. Having a single limit for insurance endorsements means you can move unused coverage from one section of your policy to another.
- If your policy’s home replacement limit isn’t enough to cover the impact of inflation, you can add any extra content insurance coverage to the payout, too.
- Inflation guard is another viable option to help protect yourself financially during this time. Aviva offers a built-in inflation guard clause in most of their home and cottage insurance policies. This provides protection for customers against inflated home rebuilds within the first six months of the coverage term.
2. Number of Claims Increasing Due to Climate Change
Climate change is a global concern and has been felt across Canada in recent years. The risks are becoming too great for the insurance industry to bear. Why? Weather-related insurance payouts are starting to exceed the home insurance premiums insurers collect. As forest fires, storms, floods and other weather events increase in frequency, they will continue to cause extensive damage. As a result, homeowners will have to bear the brunt of it.
3. Observing Risk from a National Perspective
Climate change is another major factor contributing to the rise in home insurance premiums. Even if you don’t live in an area that has been impacted extensively, home insurers can still raise prices across the country to make up the difference. Justin Thoulin, CEO and Co-Founder of lowestrates.ca, believes that “more claims are going to need to be paid out by the insurance companies and therefore, higher prices will be [a result for] consumers and businesses when it comes to home and dwelling insurance.”
Recessions and Home Insurance: Conclusion
While Canadians weather the current recession, it is important not to let your home insurance go unchecked or lapse. While interest rates can potentially stop increasing next year, the housing market won’t bounce back right away. And it goes without saying that this has a direct impact on the home insurance market. While you may be feeling weary of the financial year ahead, remember that you have options. Speak with one of our isure representatives today to learn how to ride out the recession and how it affects your home insurance.
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