Higher ROE returns needed for stability in volatile auto market

Insurers should reconsider their future return on equity (ROE) targets in light of the volatility existing in the Canadian private auto insurance markets, actuarial panelists told delegates attending the National Insurance Conference of Canada in Ottawa-Gatineau, Quebec.”Return on equity: this is in my view a change in the landscape, and is an area or issue in which companies should be doing some soul-searching,” Richard Gauthier, a partner at PricewaterhouseCoopers, said. “The auto market today is not the old product of Yore. It’s no longer an area where the level of certainty is sustained over time.”Regardless of the equity that your shareholder demands, the case can be made that the auto product requires higher [ROE] returns and that will compensate for the volatility.”The ROE is a calculation of a company’s net profit, divided by the company’s average shareholder equity (or net worth) over a certain period.The moderator of the auto actuarial panel, Francois Boulanger, president and CEO of RBC General Insurance Co., noted the uncertainty around claims costs in auto potentially affects insurers’ predictions about how much of their reserve funds to release, which in turn affects their ROE and capital calculations. Higher ROEs would amount to leaving the company with more capital to pay for escalating costs, panelists noted. The volatility affecting auto results is the result of higher loss ratios and a number of legal challenges to caps designed to keep insurers’ costs down, panelists observed. In Alberta, the Court of the Queen’s Bench this year struck down the province’s Cdn$4,000 cap on auto insurance minor injury claims. An appeal has been heard and the ruling is pending.While the outcome of the Alberta appeal is uncertain, trial lawyers have either launched actions or threatened to launch actions against minor injury caps in the Atlantic provinces. In the meantime, Ontario lawyers have indicated they would be prepared to challenge the province’s verbal threshold for determining serious injuries, as well as the Cdn$30,000 deductible applied in Ontario to accident benefit claim awards of less than Cdn$100,000. Ron Miller, principal of Baron Insurance Services, said if the caps in Alberta and the Atlantic provinces were to be permanently removed, insurers in Alberta will pay additional damage losses of up to Cdn$160 per car and Nova Scotia insurers could expect to see their losses climb by Cdn$250 per car.In the Ontario market, the largest private auto market in the country, if the verbal threshold defining a serious impairment and the Cdn$30,000 deductible were to be permanently eliminated, Miller said, additional claims costs to insurers would amount to Cdn$375 per car.