April 4, 2017 by Angela Stelmakowich
The Fort McMurray wildfire and other large weather events combined with the lowest return on investment (ROI) in decades to produce a very difficult year for Canada’s p&c insurance industry in 2016, David McGown, senior vice president of strategic initiatives for Insurance Bureau of Canada said Tuesday.
The challenging conditions resulted in the p&c industry witnessing return on equity (ROE) of 5.6% in 2016, the lowest since 2002 and almost half the more than 10% in 2015, McGown said during Swiss Re Canada’s 32nd Annual Canadian Outlook Breakfast in downtown Toronto.
“Hardest hit were reinsurers who shouldered a significant proportion of the Fort McMurray claims. Reinsurers experienced a combined ratio of 102% and an ROE of 3.3%,” he told those assembled for the annual event.
“Reinsurance coverage likely prevented a challenging year from becoming a disastrous one for our industry,” McGown told a packed room. “Domestic and global reinsurers picked up an estimated 85% of the Fort McMurray losses.”
Circumstances left no way to sugar coat 2016 results for the p&c insurance industry, McGown suggested.
“Due to higher claims, underwriting income declined by over $1 billion,” he said. “This pushed the combined ratio to 99.5%. Without reserve releases, we estimate the combined ratio could have hit a high of 104%,” McGown reported.
Beyond shrinking returns for private passenger automobile lines and continuing low ROI, he said, the increase in natural catastrophes made their presence felt.
“At $5.2 billion, the 2016 total for Cat losses was truly unprecedented,” McGown said. While the so-called Fort McMurray wildfire represented a large chunk of the total – an estimated $3.77 billion – other Cat losses over the course of the year amounted to more than $1 billion.
That brought personal and commercial property loss ratios to 73% and 77%, respectively.
Once again, Alberta was hit hard. “Total insured losses from Cat events in Alberta have topped $450 million every year since 2010,” McGown pointed out.
What does the year ahead hold for the p&c insurance industry in Canada?
“In this new political climate, it’s a no-brainer to say that we should expect more uncertainty,” he told attendees.
McGown pointed to future events such as the upcoming elections in France and Germany, as well as past events such as Brexit and the election of U.S. President Donald Trump.
Past events have resulted in “uncertainty and an uncharted path forward for governments, regulators, investors and, of course, businesses,” McGown said.
That uncertainty may be further advanced by President Trump’s apparent perception that the U.S. economy is in bad shape – this despite an unemployment rate less than 5% and being in the midst of a robust recovery, he suggested.
“When policies are set based on misperceptions, the risk is incoherence,” McGown said. “We always ask how the U.S. administration’s trade and immigration policies will affect Canada. What will be the effect on financial markets and bond yields?”
With interest rates unchanged and overall growth in Canada – at 1.4% – modestly better in 2016 than in 2015, “yields on government bonds remained low for most of the year,” McGown said. “For our industry, this is significant because government bonds make up almost 40% of our industry’s investments,” he told attendees.
That said, “today I’d wager that none of us in the room would dare to predict” what influence U.S. policies will have.
There are some hopeful signs, including a projected increase in global economic activity and Canada’s economy exceeding expectations, now growing at an annualized rate of 2.3%.
But that bit of optimism should not make the p&c insurance industry forget about “what may be its most challenging year in a decade or more” and the expected continuing challenges, McGown suggested.
“The stark reality is that 2016 may not be exceptional. With nat-Cat losses now averaging $1 billion a year and rates of return remaining low, our industry may be facing a ‘new normal,’” he cautioned.
Another continuing challenge will be out-of-date regulation on auto products. “The regulatory environment across the country for auto insurance lags far behind today’s technology and today’s consumer expectations,” McGowan said.
For private passenger auto in 2016, the total loss ratio increased about a percentage point to 76%. “Historically, a loss ratio of around 75% was a sign for optimism. But in this low-return environment, the 75% benchmark may now be too high for break-even,” McGown explained.
“I think we can agree that our customers are as frustrated as the industry. And the root of the frustration – ours and theirs – is, ultimately, cumbersome provincial regulatory systems,” he maintained.
“What can we do as an industry? Firstly, we can recognize that fixing the problem is a shared responsibility among insurers, governments and consumers. And then we can do the hard work of collaborating to find solutions together,” McGown said.
Regulators, governments and the p&c insurance industry need to ensure steps taken respond to customer needs. “Together with governments we can find the sweet spot between innovation and consumer protection,” he suggested.
“Does it meet consumers’ needs now? In a volatile world, that’s the question we need to ask about each shiny new option that competes for our time and our capital,” McGown said.
“When we can demonstrate that a new idea is good for consumers – and consumers demand it – our political partners and regulators are more likely to champion innovation right alongside us,” he told attendees.
Work is also required with regard to property lines and soaring nat-Cat losses. Part of the problem, McGown pointed out, is “short-sighted land use policies that continue to allow development on floodplains without appropriate risk reduction.”
Some of the homes destroyed in the Fort McMurray wildfire – located on a floodplain – have been given permission to rebuild in the same location, he reported. “The province or the municipality could have refused permission for people to rebuild.
They could have required them to move to a new area where they would be at reduced risk for another disaster,” McGown said. “But that didn’t happen.”
Recent funding announcements in the 2017 Federal Budget, however, are encouraging for those looking to advance disaster-proofing and resiliency.
McGown cited the $2 billion for a Disaster Mitigation and Adaptation Fund (a sizable chunk of these infrastructure dollars will be directed to flood mitigation projects), and almost $200 million to implement new building codes to focus on climate resilience.