Why Canadian businesses aren’t feeling the market softening yet

Commercial insurance markets may be getting softer, but Canadian small businesses are not feeling it yet, according to a recent report by the Canadian Federation of Independent Business (CFIB).

Both the CFIB and insurers say the financial burden is caused in part by provincial retail tax being charged on top of insurance premium taxes in five different provinces.

“While rising costs of taxes, regulations and wages remain major concerns for many SMEs [small- to medium-sized enterprises], we have seen a notable increase over the past year in the number of members identifying insurance premiums as a top cost constraint for their business,” says the CFIB report, released in December.

“A recent CFIB survey found that insurance costs rank among the most harmful taxes and fees to small businesses’ operations, with 62% of business owners identifying them as a significant burden, second only to payroll taxes.”

The CFIB report found half of Canadian business owners surveyed experienced an increase of 10% or more in their insurance premiums over the past year. For a typical SME, a 10% increase in annual total insurance costs would equate to approximately $1,500 more in insurance premiums, the report says. CFIB defines SMEs as businesses with anywhere between 1 and 499 employees.

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CFIB asked its members how much they’re paying for insurance premiums. Typically, SMEs will purchase three different types of coverage, with premiums for commercial property being $6,000 annually, auto $5,000, and commercial general liability (CGL) $4,850. Some SMEs will have all three types of policies, meaning their premiums would be $15,850.

These costs are preventing businesses from reinvesting capital in their operations, or from innovating, CFIB says. In some cases, SMEs may opt not to purchase insurance, and that worries the Insurance Bureau of Canada.

“Taxes charged on top of commercial insurance policies emerged as one of the top concerns for Canada’s business organizations,” IBC manager of communications Mark Cripps and Cecilia Omole, manager of policy development at IBC, commented in a website post. “The report finds that depending on the province or territory, insurance premium taxes and retail sales taxes can be up to 20% of commercial insurance premiums; this can result from an overlaying of taxes, otherwise known as ‘a tax on a tax.’

“The significant cost taxes add to a premium may deter businesses from securing adequate coverage.”

Both the CFIB and the IBC are calling on governments to drop or reduce retail sales taxes on insurance premium taxes.

CFIB’s report identifies five Canadian provinces that charge retail sales tax on top of an insurance premium tax. They are as follows (all figures are for commercial lines):

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