This September, Canada’s inflation rate rose to 4.4%, the highest it has been since 2003. Many homeowners fear for what the year ahead may mean for their insurance rates. As well, potential homeowners are straying from taking the plunge in the current market. We examine the potential effects of a recession on your home insurance, as well as 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?

Post-pandemic effect 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 is when growing demand for goods or services meets insufficient supply. This drives prices higher, which is having an effect on everyone. As lockdown mandates were lifted, Canadians began feeling safe leaving their homes again and heading back to work, resulting in gasoline demand rising. Meanwhile, factors like the war in Ukraine and continuing supply chain issues were also causing prices to soar. Interest rates are currently at their highest level in 15 years! The Bank of Canada is fighting inflation rates not seen since the 1980s. As a result, many experts agree that Canada has likely just entered a moderate recession that will last for much of 2023.

Recession impact on consumers

A report first published by RBC Economics on Oct.12, 2022, predicted the arrival of a recession in the first quarter of 2023. In it, the following predictions were proposed:

  • Higher prices and interest rates will shave $3,000 off the average household’s purchasing power weighing on goods purchases.
  • Prices for most items, outside of food and energy, are rising by more than 5% from a year ago. 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.

Key points to consider:

According to Statistics Canada data released in May 2022, cost increases have been particularly dramatic in:

  • Transportation: Driven by surges in gas prices that neared 50%.
  • Food: Grocery prices have risen by nearly 10%.
  • Housing: Up 7.4% as mortgage rates continue to increase.
  • Services: Up 5.2%, with accommodations up 40.2% as travel demand resumes to pre-pandemic levels.

Recession and home insurance: The three impacts

Experts have weighed in and made some predictions in terms of spending and the cost of insurance for the coming year. The October’s Consumer Price Index also saw an inflation rate of 7.6% year-over-year for home and mortgage insurance. Home insurance rates are expected to continue to rise across the country over the next year due to the following:

1. Inflation

Economists at believe that households that are highly in-debt will be hit hard. They also believe those that own over-valued homes will also feel the effects. During the pandemic, homeowners saw their home’s value soar. Today, the market is in the midst of a major correction with prices expected to fall 30% before bottoming in mid-2023. It has also been predicted that the Bank of Canada will keep the policy rate at 4.25% through 2023 as it assesses the economy and inflation. Inflation has an effect on many factors related to recession:

a) Increases in home insurance rates in Canada

According to March’s Consumer Price Index, the cost of home and mortgage insurance rates have increased by 8.6% when compared to the previous year. This is due in part to the popularity of variable-rate mortgages in Canada during the pandemic, 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. As workplaces worldwide shifted towards working remotely, many of us chose to spend money on our “staycation” residence. Meanwhile, the frequency and severity of extreme weather events has driven demand for rebuilding/repairing damaged properties. Combine these factors with ongoing supply chain issues and labour shortages, as well as surging costs of building materials, construction is more expensive than ever and projects are 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. As a result of limited supply of building materials, pandemic-related supply chain issues, and worker shortages, the Consumer Price Index reported a 12.9% price increase for home replacements as of March 2022. This means that the cost to replace your home may potentially be higher than the original value it was quoted for 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 repair and replacements more expensive for home insurance companies, you can expect policy premiums to continue to rise. The jobless rate will near 7%, which is less severe than in previous downturns.

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 is 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. And having a single limit of insurance endorsement 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 is being felt across Canada in recent years. According to the Insurance Bureau of Canada, $2.1 billion of insured losses were due to severe weather. The risks are becoming too great for the insurance industry to bear. Why? The weather-related insurance payouts are starting to exceed the home insurance premiums that insurers are collecting. 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 big factor contributing to the inflation of home insurance. 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 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.”

The bottom line

While Canadians weather the storm of the current recession, it is important not to let your home insurance go unchecked or even 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 more about how to ride out the recession and its effect on your home insurance.

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