Canada’s growth offsets turbulent industry climate: A.M. Best

The outlook for Canadian insurers remains stable in the wake of a recent turbulent period, but although insurers appear well-positioned to manage ongoing and upcoming challenges, they must guard against becoming complacent, notes A.M Best’s new special report on Canadian property/casualty & life insurance.

“Property/casualty insurers endured a string of catastrophe losses in 2013 and are bracing for market-changing regulations in some segments,” notes the report released Tuesday, in advance of A.M. Best’s 2014 Insurance Market Briefing – Canada in downtown Toronto Wednesday.

“The Canadian P/C market proved to be very resilient in the face of financial and operational pressures from the events of 2013,” the report notes, pointing out that the industry “still managed to eke out an underwriting profit, produce a respectable return on equity and grow its equity base” despite a year that saw insurable losses reach a record $3.2 billion.

The record tally followed last year’s thunderstorms, ice storms, hailstorms, train disaster in Quebec and unprecedented flooding in Alberta and Ontario.

One of the upcoming challenges, though, could be the Ontario government’s plan to reduce automobile insurance rates by an average of 15% within two years.

“Significant premium reductions without additional reforms may expose the P/C industry to significant capital risk,” A.M. Best cautions. “Given that Ontario is the largest province and auto is the largest line of business in Canada, the mechanics of the plan will have far-reaching implications for the industry.”

The report notes that the list of challenges and threats facing the Canadian P/C industry has remained fairly consistent over the past few years. “However, the dynamics of each challenge have evolved and will continue to do so.”

•Risk management and underwriting – Given the prolonged nature of the low interest yield investment environment, the importance of better differentiating underwriting risks has increased. As such, the use of technology in the underwriting process only continues to grow.

•Ontario auto – The margin compression that is likely to occur will be widespread, given the overall size of the market. The industry currently appears to have the capacity to absorb the impact, but each company’s results will continue to be monitored.

•Consolidation – Over the past five years, the influence of consolidation within the Canadian P/C market has been remarkable. In 2007, approximately 58% of the market was concentrated within the top 10 insurers; by 2013, the top 10 cornered 69% of the market. Given overall market dynamics, additional consolidation within the Canadian P/C sector remains distinctly possible.

•Demutualization – Now that regulations governing demutualization have been passed into law, the government can move forward with writing and releasing the long-delayed draft. The exact terms of demutualization – and the specifics of how it will look within the final regulatory framework – are not yet clear.

Given the level of catastrophe losses, the report notes that it is hardly surprising that underwriting profitability deteriorated in 2013 compared with the prior year.

The industry loss ratio climbed to 68.7%, a 3.4-point increase, the expense ratio ticked up to 31.1% from 30.9%, and the overall combined ratio deteriorated to 99.8%, a 3.6-point increase, as net underwriting income fell to about $190 million from almost $1.5 billion. “Despite the unprecedented catastrophe activity, 2013 marked the fifth consecutive year that the Canadian P/C industry produced sub-100 ratios,” the report states.

“Although catastrophe events negatively impacted 2013 earnings, A.M. Best believes core performance will continue to benefit from ongoing profitability initiatives, and the industry will maintain its strong risk-adjusted capitalization.”

Still, the rating agency cautions against insurers becoming complacent. “Management teams must continue to build on underwriting initiatives, technological advances and improvements in enterprise risk management that have taken place over the past couple of years. Furthermore, the deficiencies exposed by the travails of 2013 need to be addressed so the industry will be well-positioned to respond to any challenges that emerge in 2014 and beyond,” the report emphasizes.

Overall, “modest growth of 2.3% is expected for the Canadian economy in 2014, and that rate of growth in gross domestic product (GDP) is expected to continue through 2016, driving the economy to full capacity,” the report states. This is despite the diminished global outlook and Canada’s weak first-quarter performance of 1.2%, A.M. Best adds.

The report notes that the Bank of Canada has decided to maintain an accommodative monetary policy, citing on-track inflation forecasts, ongoing recovery in the housing market and continued modest economic growth. “Canada’s economy and financial sector are healthy, but still the IMF recommends increased monitoring and provisions to handle any risks that may arise from this long period of accommodative policy,” the report adds.