What might impact Canadian P&C insurers’ ROE?

Canada’s property and casualty (P&C) insurance industry posted a 16.1% return on equity (ROE) in 2023, stronger than the 14.4% three-year average, says Aon’s fall 2024 insurance market update for Canada.

“Remediations to portfolios in recent years have resulted in profitable underwriting results after having reached healthy pricing levels and focusing on risk selection, as evidenced in the Q2 2024 industry results,” Aon’s report says, adding stable interest rates in 2023 and 2024 have aided insurers’ investment results.

Problem is, as central banks move to cut interest rates, “investment returns will also decelerate, and insurers are being pressured to step into growth mode,” the report says. “While still having to maintain the balance of growth and profitability, some markets are taking advantage of the situation by taking a more aggressive stance on pricing in some lines of business and increasing capacity and appetite.”

But even as P&C insurers look to grow market share, this year’s record Nat Cat activity could lead to stricter approaches to underwriting discipline being adopted.

“Policyholders should be prepared to provide robust information to meet underwriting requirements. If primary markets are required to absorb more losses following reinsurance renewals, insurers will be more selective in deploying their capital, particularly for catastrophe exposures,” says the report.

 

Commercial property

Looking at commercial coverages, Aon says Canada’s property market generally shows modest improvement and notes carrier appetite has increased as has flexibility.

“While some carriers are maintaining existing limits and capacity, there is additional capacity available, particularly for well performing and low risk accounts, and there’s a push by some markets to start writing 100% of accounts again,” Aon says.

It notes markets are quick to put up non-lead lines, but lead markets are still strained. Rates continue to consolidate in response to increases in capacity as insurers compete for growth.

“Policyholders with low catastrophe exposures and favourable risk attributes such as highly protected/non-combustible risks are seeing greater price reductions and competition, but more challenged risk profiles such as catastrophe exposure (wildfire, hurricane, flood, earthquake) and unprotected frame risks can continue to expect increases,” Aon’s report reads.

Further, markets continue to focus on insuring to value, and smaller and mid-market participants continue to push baseline increases due to inflation. “Should insurers deem valuations inadequate, co-insurance or margin clauses can be expected,” the report adds.

Levels of technical scrutiny for underwriting put in place during the last market cycle will remain. And valuation appraisals, risk engineering, mitigation plans, and full-fledged construction, occupancy, protection and exposure (COPE) details are expected to influence coverage and pricing available to clients.

 

Covering casualty

Although still competitive, commercial casualty markets also are seeing a two-tiered market emerging in the face of insurers opting to function either as excess or primary participants.

“Primary limits are moderate, and most insurers are consistent on terms, conditions, and price. The excess liability market is experiencing more aggressive competition and policyholders are seeing greater premium reductions and enhanced coverages,” Aon says.

At the same time, large blocks of capacity seen prior to the hard market have yet to re-emerge as insurers look to manage exposure to large losses.

To that end, “exclusionary language for per-and-polyfluoroalkyl (PFAS) chemicals [colloquially called ‘forever chemicals’], wildfire, and eastern European exposures continue to be pushed. High-hazard and accounts with large losses remain exempt from the industry trends and still face challenges,” says Aon.

 

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