Canadian Market (June 01, 2010)

CANADA’S P&C INDUSTRY DESCRIBED AS OVER-CAPITALIZED AND UNDERPERFORMING

The Canadian property and casualty industry is over-capitalized and reporting low returns on investment, thus mitigating against the investment of new capital into the industry, said Philip Cook, CEO of Omega Insurance Holdings.

Cook spoke as a panel member at the Property and Casualty Underwriters’ Club (PCUC) luncheon in Toronto on May 18. The panel discussed the current global economy from an investor’s standpoint.

Despite the fact that Canada’s P&C insurance industry is well-regulated and fared better than its U.S. and European counterparts in the global economic recession, Canada just does not have a rate of return that would be appealing from an investment standpoint, Cook suggested.

“For example, in 2009, domestic property and casualty insurers had $60 billion of capital and its net income on that $60 billion was $2 billion,” Cook said, noting the rate of return on that would be 3.33%.

Similarly, property and casualty insurer branches in Canada had $24 billion of capital in 2009, with a final net income of $1 billion, forming a return rate of 4%.

“If you combine all of that, the industry-wide ROI is 3.5%,” he said. “A lot of excess capital and relatively small returns will mitigate against new capital coming into the P&C industry in Canada.”

‘NEW NORMAL’ IS FOR HARDENING MARKET TO OVERLAP WITH ECONOMIC RECESSION: ZURICH CANADA VP

The ‘new normal’ for the Canadian property and casualty insurance industry is the need for a hardened market cycle to happen, characterized by higher insurance premiums, during an economic downturn, when policyholders need their money the most.

And yet if insurance companies don’t raise their rates now, they are only “digging themselves deeper into a hole,” says Robert Fellows, senior vice president of Zurich Canada.

Fellows was a breakfast keynote speaker at the CIP Society Symposium 2010, held in Toronto on May 13.

“The only problem is, the timing of the market cycle is turning simultaneously with the economic cycle, which means that it will be more difficult to sell rate increases to our customers [because of] the impact of the recession,” Fellows said.

Fellows observed that, given increasing loss ratios in auto liability lines, companies that didn’t respond with at least a 6.3% annual rate increase would be losing ground.

“So ‘as-is’ renewals just don’t cut it in this case,” he said.