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Canadian p&c industry seeing frequency in 2014 compared to the severity of 2013: A.M. Best

September 4, 2014   by Angela Stelmakowich, Editor


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2013 and 2014 reflect stories in severity versus frequency for the property and casualty industry in Canada, Joel Silverthorn, a senior financial analyst for A.M. Best Company Inc., said during the company’s 2014 Insurance Market Briefing – Canada.

With events such as ice damming, frequent storms and continued water events, this frequency “crept in below retentions,” Siliverthorn told attendees of the briefing in downtown Toronto Wednesday.

A.M. Best’s special report – released in advance of the briefing – notes the overall p&c industry combined ratio deteriorated to 99.8% in 2013, a 3.6-point increase from the prior year. Over the last five years, the combined ratio was 100.9% in 2009, 100.7% in 2010, 99.1% in 2011, 96.2% in 2012, and 99.8% in 2013.

Unlike what was seen when the combined ratio was about 99 at the end of 2013 – which Silverthorn calls “just barely break even” – when the industry starts seeing “the 103, this is all being kept. It’s not going off to the reinsurers,” he says.

A.M. Best Company Inc. held its insurance market briefing in Toronto

“This is all part of what’s happening at this moment, because the industry itself is taking on this burden, because it’s a frequency event, not a severity event,” Silverthorn added.

Also emerging is the prominence of water as a peril. Noting that two of the largest-ever Cat losses occurred in 2013, he told delegates that water has now taken over fire as the largest peril.

“In view of the significant financial obligations and potential reputational risk associated with water claims, insurers have taken decisive actions, the impact of which will play out over the next couple of years,” notes the A.M. Best report.

Property and casualty companies have been reacting to this in a number of ways to exclude part of the risk, Silverthorn pointed out, including by raising rates, bringing back endorsements for those who want to buy back in to that coverage and looking at limits. The report also cites continuing to invest in new technologies in an effort to mitigate future losses.

“To this comes the data question for flood,” Silverthorn said. “Do they have the right data for the flood plains? Are they getting the right data? Is the modelling there? All of these are questions that actually will continue moving forward,” he added.

“Representing the worst result since 2009, the net loss ratio for personal property was 71.7% in 2013. The commercial property loss ratio was 78.5%, also the worst result recorded in recent memory,” notes the report.

“While premium grew in both lines, generally from rate hikes, the loss ratios reflect the severity of weather-related catastrophe events of 2013. Sewer back-up claims on personal property policies and flood claims on commercial policies drove the bulk of the deterioration. The results also were affected by more run-of-the-mill losses originating from thunderstorms, hail and ice,” the report adds.

Silverthorn pointed out that personal property net loss ratios looked to be going down in 2014 Q1, but then began moving up again in 2014 Q2.

“This is because more hail and weather events did happen in the second quarter. And with these happenings, they’re all events that are going below retention. So, again, frequency events are driving up property loss ratios.”

A.M. Best is seeing less of an effect from frequency on the commercial side, but that is “most likely because the companies’ deductibles are that much higher and they’re actually not able to get past those,” Silverthorn suggested.

However, while commercial property net loss ratios are fairing better than on the personal property side, “they are still high from where they had been in the past,” he said at the briefing.

On the positive side – despite a plethora of floods, a large amount of hail, thunderstorms and one of the coldest winters in 100 years throughout Canada – the Canadian p&c industry produced a “number that reflects an industry that had learned over the past few years. It had taken rate when it needed to, especially on the property side, and it had been learning from things that had been happening to it throughout the prior years,” Silverthorn told attendees.

That performance “says a lot to the strength of the industry, where they have come from where they were, and what they were able to do with probably the worst catastrophic year on record.”

The tally for 2013’s cat events – including thunderstorms, ice storms, hailstorms, the train disaster in Quebec and unprecedented flooding in Alberta and Ontario – contributed to record insurance losses of $3.2 billion for the year.

“In our opinion, on the p&c side, we believe the Canadian p&c market is well-positioned and we are still maintaining a stable outlook,” Jacqalene Lentz, a senior financial analyst with A.M. Best, said during the briefing. “Stable by our definition is an indication that there’s a low likelihood that there will be significant rating changes over the near term,” Lentz told attendees.

“The market remains stable despite influences such as investment pressures with the low interest rate environment, and the market remains stable despite consolidation among the carriers,” she said, but added a caution.

“With these types of pressures, the p&c industry cannot afford to underwrite unprofitable business,” Lentz noted. “We have to adapt; that’s the bottom line.”

P&C companies “must continue to build on their underwriting initiatives, advancements in technology and work on getting dynamic and ever-changing enterprise risk management plans,” she emphasized.

“We definitely heard from companies that they entered 2014 with lots of optimism, but I think the below-average frigid temperatures and wind chill quickly muted that optimism from Winnipeg all the way to the Maritimes,” Lentz noted, adding that heavy snow and ice damming did little to help.

“So it appears that weather frequency into the first half of 2014 is again driving results,” she added.

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