Smoke Over the Horizon

Insurance Bureau of Canada (IBC) and Swiss Re combined to observe some recent trends in the Canadian P&C and global reinsurance markets at the Swiss Re 2011 Canadian Insurance Outlook 26th Annual Breakfast meeting held in Toronto on Mar. 31.

IBC reported Ontario’s auto insurance reforms, introduced on Sept. 1, 2010, have brought some relief on the accident benefits side. But rising auto liability loss ratios are a concern.

And Swiss Re suggested the Mar. 12, 2011 Japan earthquake and resultant tsunami may have the effect of hardening global rates.

Ontario Auto

Increased loss ratios on the auto liability side and other signs suggest the reforms have not entirely eliminated abuses in the auto accident benefits side of the business.

Gregor Robinson, IBC’s senior vice president and chief economist, made the observation while answering the question ‘Are the Ontario auto reforms working?’

Ontario auto insurance premiums represent about 25% of the total premium collected by Canadian property and casualty insurers across the country. After worsening financial results in Ontario auto over the past three years (IBC estimated Ontario auto losses totaled $1.7 billion in 2010), Ontario implemented auto insurance reforms on Sept. 1, 2010 to help bring insurers’ claims costs under control.

It is still early in the reforms, but already insurers are starting to see worrying trends, Robinson said at the breakfast. First among them, the Ontario auto loss ratio went up from 97% in 2009 Q4 to 107% in 2010 Q4.

“On first glance, the results don’t look good, with a 10% increase over the last quarter of 2009 for the total Ontario auto loss ratio,” said Robinson. “But this result is deceiving, because it hides a significant decline in the no fault injury benefit loss ratio over the period. Although [the Ontario auto personal accident loss ratio is] still bad at 155%, the decline provides evidence that the reforms are bringing savings.”

By way of comparison, the Ontario auto personal accident ratio in 2009 Q4 was 172%.

But deteriorating liability results have somewhat offset the gains made on the accident benefits side, Robinson noted. “More worrying is the news that, throughout the year, liability results were eroding dramatically in Ontario,” he said. “This raises the possibility that a new threat may be emerging on the tort side of the auto product.”

The Ontario auto loss ratio for liability increased from 64% in 2009 Q4 to 90% in 2010 Q4, IBC data show.

Robinson also highlighted one trend in the data that suggests reforms haven’t fully curbed abuses in the accident benefits system.

Ontario’s insurance regulator, the Financial Services Commission of Ontario (FSCO), stated after the reforms were implemented that 55% of all minor injuries would have to fit within the new Minor Injury Guideline (MIG) introduced in the reforms for insurers to make a profit.

IBC stats show a provincial average of 69% of minor injuries receiving treatment are within the MIG. But there is a wide discrepancy between the MIG numbers for claimants outside the Greater Toronto Area (where 81.5% of minor injury claimants are within the MIG) and within the GTA, where only 57.3% of minor injury claimants are within the MIG.

“A much higher proportion of minor injury claimants outside the GTA is getting guideline treatment, suggesting that the reforms have not eliminated the excesses and abuses of no-fault benefits in the GTA,” Robinson said.

Robinson noted insurers with preferred health care provider networks have a much higher percentage (80.8%) of claimants falling within the MIG guidelines.

Market Aftershock of Global NatCats

The first quarter of 2011 has brought the highest earthquake losses in the history of the global property and casualty and global reinsurance industries, said Christian Mumenthaler, Swiss Re’s chief marketing officer, reinsurance.

Mumenthaler offered a retrospective of catastrophic events from 1970 to the present day. Estimated earthquake losses hit a first-quarter record in 2011 Q1, with devastating events in Japan and New Zealand pushing estimated insured losses to more than $30 billion.

“And it’s only Q1,” Mumenthaler said.

For the most part, the private market in Japan covers only commercial risks, and only 3% of businesses take up the coverage, he said. Otherwise, the insured losses projected as a result of the Magnitude 9.0 earthquake and subsequent tsunami – currently projected anywhere between $12 billion and $35 billion – could have been higher, he noted.

Although the insurance losses of the Japan quake are manageable, the hardening of rates in Japan is very certain, Mumenthaler said.

When asked if the events of 2011 Q1 will be enough to spur a hard market in a separate interview after the presentation, he said the impact on global rates is still uncertain. But “historically these types of events have spurred hard markets,” he added.

In his presentation at the Swiss Re breakfast, Mumenthaler noted that in addition to earthquakes, it is clear weather-related events are “growing quite significantly, even in low years.”