Small Business Confidence is Rising: What It Means for Canada’s Economy and Insurance Industry

Small business owners are the backbone of Canada’s economy, and understanding their confidence levels can provide valuable insight into broader economic trends. That’s why I closely follow the Canadian Federation of Independent Business Business Barometer, a monthly index that tracks how small businesses feel about their future. Think of it as a “confidence thermometer” for small enterprises, measured on a scale of 0 to 100. Scores above 50 mean more businesses are optimistic than pessimistic, while scores below 50 signal uncertainty or distress.

For those of us in the insurance industry, this Barometer is particularly important. It helps us anticipate shifts in claims patterns, understand industry-specific challenges, and adapt to the evolving needs of our clients. By tracking small business confidence, we gain a clearer picture of what’s happening in the real economy—and what’s likely coming next.

With confidence on the rise this year, we will explore what the latest Barometer results mean for Canada’s economy and insurance landscape. But first we need to understand the impact of the Barometer.

Understanding the Implications of Business Barometer Scores

Low Scores

Periods of economic distress, such as the COVID-19 pandemic in 2020 (index: 36.3) or the 2008 financial crisis (index: 45), demonstrate how low Barometer scores mirror widespread uncertainty. These conditions often translate into:

• Increased Business Interruption Claims: Sectors like hospitality and retail, particularly vulnerable during downturns, face financial strain, driving claims under business interruption policies.
• Higher Fraud Risk: Economic hardship may lead some businesses to exaggerate or falsify claims.
• Delays in Claim Settlements: A surge in claims during low-confidence periods can slow processing times, creating bottlenecks for insurers.

High Scores

Conversely, higher scores—like the pre-COVID peak of 70.6—reflect economic optimism and correlate with business growth. For insurers, this growth presents unique challenges:

• Property and Liability Claims: Expanding businesses invest in new assets, increasing the likelihood of claims.
• Risk of Underinsurance: Rapid expansion may leave businesses with inadequate coverage, exposing them to greater risks.

Current Trends and Sector-Specific Insights

As of November 2024, the Business Barometer has risen to 59.7, signaling cautious optimism among Canadian businesses. Although the index remains below pre-pandemic highs, the recovery trajectory suggests improving confidence.

Sectoral Breakdown

Finance and Insurance (64.5): High confidence in this sector reflects its inherent stability. However, 71% of businesses cite insurance costs as a major constraint. Claims for professional liability and regulatory disputes are likely to remain prominent as businesses navigate compliance complexities.

Hospitality and Retail (51.7 and 56.1): Ongoing challenges with labor shortages and fluctuating demand result in consistent claims for theft, property damage, and liability. Rising operational costs, including insurance premiums, continue to strain profitability.

Construction (49.8): Supply chain disruptions and labor shortages weigh heavily on confidence in this sector. Common claims include project delays and contractual liabilities.

The Interplay Between the Barometer and Insurance Costs

Insurance is a significant operational constraint, cited by over 70% of Canadian SMEs, particularly in high-risk sectors like construction, hospitality, and retail. This underscores the connection between economic confidence and the insurance market cycle, often defined by hard and soft markets.

The Role of Hard and Soft Market Cycles

Hard Markets: Characterized by higher premiums, stricter underwriting, and reduced capacity, these markets often coincide with low Barometer scores and heightened economic uncertainty. Insurers raise premiums to hedge against elevated claim volumes, adding financial pressure on businesses. Many SMEs reduce coverage limits, increasing exposure to uninsured losses.

Soft Markets: Lower premiums, broader coverage, and competitive underwriting define soft markets, which align with economic recovery and higher Barometer scores. Businesses reinvest in adequate coverage as confidence rises, leading to fewer risks and disputes. Affordable premiums enable SMEs to mitigate risks and plan for growth effectively.

The economic conditions reflected in the Barometer directly influence the insurance landscape. While prolonged low scores sustain hard markets, rising confidence creates an environment conducive to soft markets, benefiting both businesses and insurers.

A Turning Tide: Optimism on the Horizon

The November 2024 Barometer score of 59.7 is a significant rebound from the pandemic low of 36.3 in 2020 and the recessionary dip to 45 in late 2023. This upward trend signals a shift towards economic stability and renewed optimism for the Canadian business landscape.

The Impact of a Low Barometer

The past year highlighted the challenges of a low Barometer score:

Higher Operating Costs: Sharp increases in premiums strained already-tight budgets.

Reduced Coverage: Many SMEs opted for reduced coverage, leaving them exposed to substantial risks.

Delayed Recoveries: Limited confidence curtailed investments in expansions or new hires.

Looking Ahead

As the Barometer climbs, Canada’s economic and insurance markets stand to benefit:

Eased Cost Pressures: Stabilizing claim volumes could moderate premium rates, particularly in competitive sectors.

Increased Coverage Uptake: Improved confidence may encourage businesses to expand their insurance coverage, reducing risks of underinsurance.

Renewed Growth: Higher Barometer scores correlate with increased business investments, presenting insurers with opportunities to offer tailored products.

While the current score remains below the pre-pandemic high, the positive trajectory bodes well for continued growth. Sustained improvement could mark the transition to a soft market cycle, fostering optimism and stability.

Conclusion: A Time to Prepare for Growth

The CFIB Business Barometer serves as a reflection of Canada’s economic health and a barometer for insurance market trends. While the challenges of low confidence scores have left their mark, the current upswing provides an opportunity to prepare for growth.

Insurers and businesses alike should capitalize on this momentum, embracing tailored solutions and proactive strategies to navigate a recovering economy. If this trend persists, it will pave the way for sustained prosperity in Canada’s business and insurance sectors.

 
#SmallBusinessConfidence #CFIBBarometer #CanadianEconomy #InsuranceIndustryTrends #BusinessOptimism #EconomicRecovery #InsuranceInsights #HardMarketCycle #SoftMarketCycle #BusinessResilience #SMEInsurance #EconomicTrends #CanadaBusiness