New Measures of Success

Swiss Re/IBC Breakfast: 2006 Industry Outlook

Heading into a new “soft” pricing cycle, Canada’s insurance industry needs to measure its performance differently and go beyond the typical use of success indicators such as combined ratio and ROE (return on equity), according to Insurance Bureau of Canada president Stanley Griffin.

Griffin made his remarks to about 150 people attending the Swiss Re/Insurance Bureau of Canada ‘2006 Canada Insurance Outlook’ breakfast, held on Mar. 21 at the National Club in Toronto.

“I’m hearing that we must pay more attention to the long-term value for our customers; that we need to put them at the centre of what we do,” Griffin told his audience made up primarily of insurers and reinsurers. “What consumers want is consistency: they want consistency in availability, in affordability, and accessibility [of coverage].”

As a result, Griffin said, the insurance industry needs to pay more attention to non-traditional indicators of performance. “A good starting point would be a measure of availability, accessibility and affordability of insurance,” he said. “We always monitor these to some degree, but close scrutiny is often reserved for times of crisis. It’s time to make these indicators a priority all the time.

“We can no longer call it ‘A good year’ simply because the ROE (return on equity) was high. If our customers struggle to find affordable coverage at the same time, it was not a good year.”

At the breakfast, IBC vice president of policy development and chief economist Jane Voll reviewed the Canadian industry’s overall combined ratio and ROE for last year. Based on these statistics, “the market has indeed softened in 2005,” Voll observed.

She noted the Canadian insurance industry’s 2005 combined ratio – a figure representing the value of claims divided by premiums written – increased by 2.4% over the past year, from 90.4% in 2004 to 92.8% in 2005. Also, the industry’s ROE decreased from 20.1% to 17.9%.

PROJECTIONS FOR 2006

Voll noted the softening trend in 2005 generally was not evident in auto markets across the country. She said commercial and residential rates in 2005 showed signs of decreasing, which is generally the industry generally interprets as a sign that insurers are signing up more policyholders in an effort to increase market share.

Voll projected that if the combined ratio and ROE figures follow historical patterns, the industry might expect to see an overall combined ratio of 94.3% and a return on equity of 10.6% in 2006. “That’s if you believe that history repeats itself,” she added.

But of course history rarely repeats itself. As Voll noted: “While I showed you a cycle that could have a softening phase of over four years, it wouldn’t be unprecedented to have a softening cycle that sees the market hardening in 2007. It’s happened before.”

Referring to a record-setting year of catastrophe losses, Voll cautioned that insurers do need to be wary during times of a softening market. “Disasters don’t follow our timing,” she said. “We could have had the [2005] disasters hit in 2001, our worst year on record, and that was only a few years ago.”

Canada’s insurance industry set a record for claims payouts in 2005, eclipsing the old mark set after the 1998 Ice Storm that hit eastern Ontario and Qubec. In total, weather-related and man-made natural catastrophes in 2005 amounted to CDN$2.2 billion in losses.

To put this into perspective, Voll observed that if the 2005 losses had happened instead in 2001, when the Canadian market was in the throes of a very soft cycle, the industry’s combined ratio would have been 120.6% and the industry’s average ROE would have been below zero, at -3.3%. Given these figures, about 64 companies would have fallen below a base solvency rating of 10, she said.

To prepare for future losses, the industry will have to keep an eye on finding ways to raise new capital and funds, Michel Lis, a member of the Swiss Re Group’s executive board, said. The trouble is: the public doesn’t want the one industry that most needs to make money to be seen as accumulating too much money.

IMAGE ISSUE

“Honestly, there is a kind of shame in showing positive results,” Lis said. “There is a low understanding [in Canada] of why this industry should earn money…The role of the industry is precisely to make money for those cases in which this wealth is needed.”

Lis noted insurers have the challenge of living in a world in which the population does not like the risks it faces, but is nevertheless “is not ready” to pay insurers premiums for assuming financial responsibility for the risks.

“I think this is something that is an image issue for the industry,” Lis said. “There is work to be done, taking into account that the risks for which this industry is needed have not diminished.”

There are new risks as well, Voll noted. For example, political elections might put pressure on insurers to reduce premiums, as politicians campaign on promises to reduce voters’ insurance rates. “In 2007, we’ll have $17 billion worth of premium exposed to provincial election politics,” Voll said, adding that provincial elections are due in Ontario, New Brunswick and P.E.I. by that time.”