For the Canadian property and casualty insurance industry, the ‘new normal’ is for a hardening market cycle, characterized by higher insurance premiums, to be required during an economic downturn, when policyholders need their money the most.
And yet if insurance companies don’t raise their rates now, they are only “digging themselves deeper into a hole,” says Robert Fellows, senior vice president of Zurich Canada.
Fellows was the breakfast keynote speaker at the CIP Society Symposium 2010, held in Toronto on May 13.
“The only problem is, the timing of the market cycle is turning simultaneously with the economic cycle, which means that it will be more difficult to sell rate increases to our customers [because of] the impact of the recession,” Fellows. “These two elements have made it impossible for us to call how and when the [insurance market cycle] turn will come. But the turn does need to come.”
In his presentation, Fellows showed charts indicating that if companies simply elected to leave their rates “as-is” in auto liability lines, they would see their loss ratios increase by 10 percentage points over the next three years.
Furthermore, he observed, given rising loss ratios in auto liability lines, companies that didn’t respond with at least a 6.3% annual rate increase would be losing ground. “So ‘as-is’ renewals just don’t cut it in this case,” he said.
“Companies that are thinking ‘as-is’ as a win are digging themselves deeper into a hole, which will mean larger-percentage increases or a capacity withdrawal, with the reality coming [eventually],” he said.
Typically, a 100% combined ratio is considered a ‘break-even’ number. But because of the low-interest-rate environment, which contributes to evaporating investment yields, “there’s no way to make money at 100 combined,” Fellows said. And this is “why 95[%] is the new 100.”