A Tale of 2 Business Lines

Canada’s property and casualty insurance industry has done a good job of keeping operating expenses under control, but Ontario auto continues to wreak havoc on the industry’s underwriting results, delegates attending A.M. Best’s ‘Market Briefing: Canada’ heard in Toronto on Sept. 8.

Uncertainty and scepticism continue to plague the recent set of reforms implemented to reduce claims losses Ontario auto. But personal property, a line experiencing an increase in the severity and frequency of claims, has taken a step forward, as insurers have taken rate in an effort to reverse the upward creeping loss ratios.

In the reinsurance sector, capital is easy come, easy go. While reinsurers continue to chug along, generating positive results, some experts are questioning if reserve releases are in fact masking deterioration in the sector’s performance. This is a trend, experts warn, that cannot be sustained for much longer.

TWO LINES, TWO DIFFERENT EXPERIENCES

Canadian property and casualty insurers have done a good job of keeping operational expenses in check, but are losing money on the claims side of the business, said Joseph Burtone, assistant vice president at A.M. Best.

“Companies are doing a nice job to toe the line on expenses,” Burtone said. “It’s the other side of it, the net loss and LAE [loss-adjustment expense] ratio, that is driving the underwriting ratio up.”

The underwriting expense ratio represents the percentage of an insurer’s net premiums written that went toward operating costs.

Canada’s property and casualty industry — excluding Lloyd’s of London, the Caribbean and ICBC markets — has reported underwriting expense ratios that have hovered around 30% since 2006 (29.5% in 2006; 29.8% in 2007; 30.5% in 2008; and 30.2% in 2009).

Loss ratios, on the other hand, remained around 54% between 2005 and 2007 and then jumped to 61% in 2008 and 60.5% in 2009.

“There’s a reason for that [jump in loss ratios],” Burtone said. “The industry has been affected by more frequent and severe weather-related events. It seems to be that in the past couple of years, it’s not if, but when [a weather event will occur]. In the past, Canada seemed to be shielded from weather-related events, but we’ve seen a real uptick in events.”

In personal property lines, the increase in frequency and severity of claims is based specifically on wind, hail and water-related claims. But the industry appears to have recognized it needs to better mitigate these risks. Burtone noted that at year-end 2009, the loss ratio for this line was 75.9%; by the end of June 2010, it was 59.2%.

“We’re finding pricing segmentation, we’re seeing inspections being done more frequently and more broker evaluations,” he said. “But, there are some concerns with aging infrastructure and this line is very competitively priced.”

At the same time the industry appears to be getting a grip on the new reality in property lines, Ontario auto continues to veer out of control. In fact, Ontario’s personal auto is really driving the Canadian property and casualty market’s underwriting loss, Burtone asserted.

Overall, the property and casualty industry appears to be stable, with positive — not robust — results. The property and casualty industry reported an underwriting loss of approximately $207.4 million in 2009, Burtone said. Combined ratios for the segment improved from 101.2% in 2008 to 100.9% in 2009.

In auto personal accident, on the other hand, the net loss ratio of this line rose to 137.6% at year-end 2009 from 116.6% at year-end 2008. In the first half of 2010, the loss ratio continued its upward trend, reaching 141.3% by the end of June.

Reforms were implemented on Sept. 1 to help stem the losses in auto personal accident. But Burtone said A.M. Best shares the industry’s concerns about the effectiveness of the reforms.

“We realize why the reforms were put in place, we know what they’re supposed to do, but we have concerns about how they’re going to be priced, what are insurers going to do to make sure that reserving is accurate and what is the [level of] consumer confidence [in the reforms’ effectiveness]?”

Reserve releases are masking deteriorating results in the U.S. and Bermuda reinsurance markets, said Greg Reisner, a senior financial analyst at A.M. Best.

REMOVING THE MASK

He noted the trends emerging in the U.S. and Bermuda markets may also apply to the Canadian reinsurance market.

The U.S. and Bermuda reinsurance industry reported a return on equity (ROE) of 16% in 2009, Reisner said.

“If you strip out those reserve releases, you’re really looking at an ROE around 11%,” he said. “And if you strip out reserve releases through the first half of 2010, we’re actually looking at an ROE around 6% for this sector. You can see that results are certainly deteriorating, but those releases have been masking that deterioration.”

Net premium written (NPW) in the U.S. and Bermuda reinsurance market has been stale between 2006 and 2009. Reisner observed the industry reported $51.7 billion in net premiums written in 2006; that fell to $50.3 billion in 2009.

The industry reported a “solid” combined operating ratio (COR) of 87% in 2006, with minimal favourable loss reserve development. But loss reserve development picked up in 2007, 2008, and 2009, Reisner said. By the end of June 2010, the industry reported 6.6 percentage points of favourable loss reserve development, far exceeding analysts’ expectations, he said.

The favourable loss reserve development “is certainly aiding underwriting results, as well as the return on equity (ROE) components,” Reisner said. “But this trend cannot continue. We are at the point where we are starting to question some companies’ reserve adequacy.”

Despite deteriorating performance in the reinsurance industry, Reisner said he continues to anticipate positive results at year-end 2010. “The thing that continues to amaze me in this business is how quickly capital can be generated, and how quickly it can be depleted,” he said.

He pointed to shareholder equity to illustrate his point. Between 2006 and 2007, shareholder equity increased from roughly $70.9 billion to almost $80 billion. “But in 2008, when we had the financial crisis and some catastrophic events, we saw all of that capital generated in 2007 deplete and then some,” he said. Nevertheless, by the end of 2009, shareholder equity not only reached the high watermark set in 2007, but surpassed it — to $88.4 billion. “It’s impressive,” Reisner said.

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It seems to be not if, but when a weather event will occur. In the past, Canada seemed to be shielded from weather-related events, but we’ve seen a real uptick in events.

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The favourable loss reserve development is certainly aiding underwriting results. But this trend cannot continue. We are at a point where we are starting to question some companies’ reserve adequacy.