Changes in the cost of insurance are influenced by the flow of capital within the market. What can businesses do?

Typically, the property and casualty (P&C) insurance market is characterized by soft market cycles, with strong competition from insurers, price decreases and availability of coverage, followed by hard market cycles. In these cases, there is a marked decrease in competition, rates increase and the coverage offered is reduced. These variations are caused in particular by the flow of capital within the insurers’ market.

After a somewhat lengthy period of fighting for market shares to capitalize primarily on cash flows from investments, insurers are slow to increase rates in line with rising claims costs.

Subsequently, over a short period, insurers compensate for the shortfall accumulated during the soft market period with large premium increases. Insurers then seek to maximize profitability by revising their underwriting capacity and abandoning certain risk categories, which leads to a significant contraction in the insurance supply.

The new market reality

From 2010 to 2018, the P&C insurance market in Canada was characterized by strong competition. Now we are seeing a significant tightening of this market across all economic industries that started rather modestly in early 2019.

Insurers are united when it comes to imposing changes in terms and conditions by centralizing renewal decisions. The impact of the insurance market downturn seen in 2020 and 2022 is unprecedented, and companies must renew their insurance programs in the turmoil. Renewals may require lengthy negotiation periods, coverage revisions, additions to terms and conditions, as well as changes in insurers, resulting in very significant rate increases.

The insurers’ pricing approach is essentially aimed at ensuring a given level of income, while the underwriting approach is based on a rigorous assessment of the risk to be insured. The current state of the market is shifting the weight of the main factors that are generally considered by insurers in setting rates.

Market prospects

Despite a major return to profitability in 2021 and the prospect of rising interest rates potentially benefiting insurers’ bottom lines, insurance supply remains constrained in the current market and signs the supply conditions are improving are slow to emerge.

However, some stabilization of the market in the medium term (within one to two years) and improved conditions in the long term (within two to five years) cannot be ruled out. The pace of market improvement remains highly uncertain.

What about self-insurance?

In the short term, there is so little insurance available that companies are forced to renew their insurance programs with their current providers.

Furthermore, approaches aimed at revising the risk financing structure by increasing the level of coverage retention do not make it possible to significantly reduce the premium increases. In fact, for insurers, current premiums represent a minimum threshold, which cannot be easily compressed given the risks assumed in light of the coverage purchased.

The cost of insurance can only be reduced significantly by cancelling guarantees (complete self-insurance). Such a decision must be supported by demonstrating its profitability in the medium and long term, but also by a willingness on the part of the company’s management to deal with a much greater variability in the cost of financing fully self-insured risks.

Getting the best possible conditions

Where full self-insurance is not an option, only improved market conditions will result in lower premiums. To take advantage of improved market conditions as soon as possible, companies should take the following steps to obtain insurance coverage at the best possible terms and conditions:

1. Work with their broker to determine the renewal timeline and objectives with respect to terms and pricing with a plan for follow-up negotiations;
2. Ask the broker to obtain alternative proposals from other insurers and send the marketing report to them;
3. Establish scenarios for the amount of retention to be purchased for each coverage;
4. Have a rigorous process to maintain and document their risk profile. The risk profile should include the following:
   • Organization’s background and governance;
   • Change in revenues and allocation by region and by product or service category;
   • Change in the intensity of activities in terms of production units or services;
   • Change in the number of employees;
   • Description of products and services provided;
   • Clientele profile;
   • Standards and practices;
   • Measures, policies and regulations to reduce the risk of loss and mitigate its severity;
   • List and value of assets to cover;
   • COPE (construction, occupancy, protection and exposure) description of property to insure;
   • Directory of third-party agreements and contracts;
   • Cyber-risk exposure;
   • Change in the loss ratio by guarantee (cost of claims/units of exposure).

Updated on October 10, 2023

Inflation is a concern for many entrepreneurs. More than ever, rigorous risk and financial management is needed.

Organizations are currently facing significant challenges. Soaring inflation, rising interest rates, labour shortages and supply issues—this confluence of factors is creating an uncertain economic environment for businesses.

That’s why solid financial planning is critical. It will help you assess your company’s vulnerabilities, proactively curb risks and promote growth.

Here are the key steps to protecting your business’ financial health.

1. Assess the situation

Start by assessing how different risk factors could affect your business and determining where its most critical vulnerabilities lie. It’s important to take into account the issues at play in your industry as well as those that are specific to your business.

Ask yourself questions such as:

• How might these risks affect your revenues and gross margins?
• Do consumers consider your products/services discretionary expenses?
• Could your sales fall if inflation hinders consumer purchasing power?

2. Establish financial projections

Financial forecasting is an essential part of sound business management. It can help you identify key issues as well as potential solutions.

You’ll need to make a number of assumptions based on the economic factors identified in the previous step. The goal is to assess the extent to which these factors will impact the company’s profitability and liquidity. For example:

• Will sales volumes increase or decrease?
• What would happen if sales declined by 5% or 10%?
• Would you need to adjust your prices?
• What would happen if you lowered your prices by 5% or 10%?
• What would happen if your supply or transportation costs increased by 5% or 10%?
• Will you need to increase wages and labour costs in order to keep up with customer demand? If so, by how much?
• How long will it take to collect accounts receivable and pay your suppliers?
• Will the company’s profits be enough to cover your financial commitments?
• What investments do you need to make to keep the business operational and ready for growth?

This exercise will help you develop different scenarios based on changing risk factors and provide clarity on the tipping points for the company’s liquidity.

Thanks to this modeling, which is commonly called a stress test, you’ll have the information you need to manage risks before things become critical and proactively look for solutions. You’ll come away with a plan that addresses your business’ unique concerns.

3. Plan effectively

Here are some important tips to help you get the most from your financial forecasting:

• Develop projections for the next 2 or 3 years, since the current environment is likely to persist for quite some time.
• Be realistic and uncompromising. This will ensure the solutions you implement are right for your company’s actual prospects.
• Focus on cash flow. Your company can withstand a certain degree of loss, but if it lacks liquidity, you’ll quickly find yourself in a precarious situation.

4. Take advantage of financial assistance programs supporting innovation

Innovation is another key factor for business success. This is especially true in the post-pandemic era, as many businesses need to reinvent themselves in order to ensure their long-term viability.

Yes, innovation can be expensive, but there are certain tax measures and subsidies available that can help your business recover up to 85% of the expenses related to technology innovation.

Depending on the stage of your company’s innovation journey, there are two main tools at your disposal: grants and provincial and federal investment tax credits.

Here’s what you need to know about these two options.

Grants

• You must submit an application to a funding agency before your project gets started.
• Grants may be issued prior to or during the research and development (R&D) phase.
• Grants can be used to cover several types of expenses.
• Funding agencies have limited budgets and their grant amounts are capped.
• These programs aren’t necessarily recurring.

Investment tax credits

• Tax credits can only be claimed after the R&D phase.
• They apply to all kinds of R&D expenses and refunds are only issued after the work is complete.
• There are no limits on available funds or eligible expenses.
• Under the Scientific Research and Experimental Development Tax Incentive Program, you can be reimbursed for up to 73% of payroll expenses and 37.5% of subcontractor and material expenses.
• Tax credit programs are recurring.
• Tax credits are subject to approval by tax authorities, so there’s always a possibility that a claim could be denied.

You can combine grants and tax credits for the same project, and even for the same expenses in the project. Our experts can help you develop taxation strategies and help your business derive the maximum benefit from these programs.

Of course, it’s crucial that all your innovation work be carefully documented—through time sheets, technical reports, contracts, etc.—to justify your financing requests.

Have questions? Our expert teams can help your business develop a solid financial plan. Contact us to speak with one of our specialists.

For more information about the topics covered in this article, check out our Life After Grants webinar (in French).

NFTs have become a key customer attraction and retention tool for some organizations. Are they something all businesses should be considering?

A non-fungible token (NFT) is a certificate of ownership and authenticity for an asset, typically a digital file such as an image, video, audio clip or other. It certifies that you’re the sole owner of a unique asset stored on a blockchain, which is a secure, shared and public digital ledger that keeps a record of an asset’s ownership history.

Since the technology confirms that you own the original asset and not a copy—though duplicating digital files is very easy to do—it creates a sense that the item is rare. This is what makes the NFT valuable. Each token has a specific value, which varies in accordance with supply and demand in what is a free and unregulated market.

It’s important to understand that NFTs aren’t interchangeable, unlike cryptocurrencies (for instance, all bitcoins are similar and have the same value). However, NFT ownership is transferable.

NFTs as tools for building consumer loyalty

NFTs are often issued for digital artworks sold at exorbitant prices. But beyond certifying these astronomical transactions, NFTs are essentially equivalent to smart contracts. They can be linked to a wide range of assets, such as physical goods, digital assets, an ownership stake in a building or a car, etc.

NFTs can be issued for collectibles, niche items, exclusive products or membership to a group. This is where NFTs become interesting marketing tools. The idea isn’t so much to sell NFTs as a revenue stream, but rather to use them for attracting and retaining customers, as well as creating brand engagement.

Here are a few different ways that NFTs have been used for marketing purposes.

Montreal Canadiens

In the fall of 2021, the Montreal Canadiens started selling special packs of digital pucks, photos and commemorative game tickets on their Dropshot platform. Collectors can now trade these NFT on the platform.

National Basketball League

The National Basketball League created NBA Top Shot NFTs, which are packs of animated trading cards that feature some of the best shots of all time by the sport’s top players.

Just for Laughs

Just for Laughs is selling a collection of digital art and highlights from the comedy festival’s history, including a recording of the first time they got a laugh from the audience.

Now consider a company that makes niche goods or luxury products, such as clothing, sports accessories, alcoholic beverages, etc. It could follow the example of the Montreal Canadiens or Just for Laughs by offering digital assets to generate buzz around their brand. Major brands like Nike and Gucci are already on board and selling NFTs.

Contracts with multiple possibilities

Another thing to know about NFTs is that the tokens are programmable. This means a company could sell an NFT that essentially serves as a membership card and program it to give the NFT owner access to perks or events.

And since NFTs are both unique and traceable, they could be used as proof of eligibility for a service, like a maintenance guarantee. By virtue of being contracts, NFTs open the door to a whole host of possibilities.

Making NFTs mainstream

Despite all the potential of NFTs, selling them currently remains a technical challenge because you need to have a reliable and secure payment system. That’s why it’s mostly just large companies that are capitalizing on NFTs right now.

But we can expect NFT sales platforms to crop up with simple solutions and secure payment systems. This kind of service could be a total game-changer. In fact, Shopify, which already has a reputable e-commerce platform, is presently testing a beta version of an NFT-commerce platform. It will allow consumers to purchase NFTs directly from a merchant’s secure site and pay for them by credit card.

Knowing this, your company may want to start thinking about adding NFTs to its e-commerce strategy.

NFTs and the metaverse

Looking ahead, there’s a chance that NFTs could find a huge market in the metaverse (i.e., digital worlds accessed through virtual reality headsets). Your avatar will be able to buy goods in the form of NFTs, attend concerts, join team meetings, perform endless tasks while playing games—all virtually, of course.

A growing number of companies are interested in the metaverse, and it’s not just big tech players like Facebook and Microsoft. We’re also seeing manufacturers like Nike sell virtual clothing for video game avatars.

This article was written with Guy-Jacques Langevin, co-founder of Buzztroop.