Canadian P&C industry cautioned about past soft markets

The Canadian property and casualty industry posted excellent results in 2006, sporting a 91.7% combined ratio and a 17% return on equity (ROE), but it should be mindful of the lessons learned from soft markets in the past since 2007-08 results are expected to deteriorate, A.M. Best warned in a recent report.

The A.M. Best report, Canadian Property And Casualty Insurers Should Heed The Past To Avoid Market Instability, available on Ratings Direct, noted the Canadian P&C industry remains well-capitalized, with a minimum capital test ratio of about 250% for 2006.

“Although these results are impressive, especially considering this is the third straight year industry returns have been very strong, we expect them to weaken for the rest of 2007 and 2008,” A.M. Best noted. “With more than 200 industry participants, the market is as competitive as ever and there’s always the temptation for companies to cut pricing to increase market share, especially if they feel the current operating environment and conditions are sustainable.”

The report notes the Canadian insurance industry benefited in 2006 from a low claims frequency and favorable weather patterns. These conditions have “offset the need for rate increases and may have created a false sense of security in the sustainability of results,” A.M.Best says.

There are clear indications the market is experiencing “softness” and claims costs are rising, the report continues.

“This will ultimately lead to a deterioration of results. Given the cyclical nature of the P&C industry, turmoil similar to what the industry faced in 2001-2002 is possible if it’s not mindful of the past.”