The rise and fall of the P&C industry’s financial results

As the Alan Parson Project once sang, “What goes up, must come down,” and predictions about industry profitability made two years ago are unfortunately coming true — including a marked downward trend of financial results in 2023, says one veteran industry analyst.

Two years removed from the Canadian P&C insurance industry’s record-breaking results, featuring total underwriting income of more than $8 billion, underwriting income has plummeted to approximately $1.1 billion during the first three months of 2023, says Phil Cook, chairman of Accelerant Insurance Company of Canada.

That’s on pace to finish at just under $1.5 billion for the year, a long way off from even the almost $5 billion of underwriting income in 2022.

“The final figures for 2023 have not come out yet, but preliminary indications are [the industry’s combined ratio] of 97% or 97.5% will probably hold,” Cook said at the Insurance Institute of Canada’s Industry Trends webinar, held last Thursday. “It might go up slightly, depending on what the impact is of the new actuarial requirements [e.g., IFRS-17], so it doesn’t look as though it’s going to be a banner year. In fact, [the industry’s COR] might even push up towards the 100[%] mark, which is not very exciting for anybody.”

Cook noted financial results in 2021 — which featured a hard market cycle in the middle of the global COVID-19 pandemic — were ground-breaking for the industry.

“In 2021, you’ll see that we were at 85.12% combined ratio, which was extremely good. In fact, it was the lowest, or should we say best, in 40 years. In 2022, it deteriorated a little bit, but still was in good shape. Nine months into 2023, though, have shown a significant deterioration.”

Catastrophe and weather-related losses, including a record-breaking wildfire year, pushed up the industry’s COR in 2023, Cook observed. This, despite rising interest rates starting to improve the P&C insurance industry’s investment income.

Part of this is attributable to the increase in ‘kittens,’ which Cook described as severe weather-losses that don’t quite meet the $30-million threshold to qualify as catastrophe or ‘Cat’ losses.

Related: How the industry’s ROE is trending

But the Cat losses have a significant influence on the country’s P&C industry, mainly because of the distribution of the lines of business, he observed.

“The premium allocations in Canada for all lines breaks out like this [excluding public insurance regimes],” Cook said. “Automobile premiums, you’ll see they’re 38% of direct premium — 30% personal lines and 8% commercial. Then property is 39% of total premium.

What’s significant, Cook said, “is the combined property and auto, which represents 77% of the direct premium [in Canada]. That splits between 49% personal and 28% commercial. And that just leaves us with other lines at 23%.

“The significance of this is that obviously anything that impacts the property and…the automobile results is very volatile, because it’s touching on 77% of our premium volume. So it’s very, very important. There’s very little we can do on the other lines, assuming that they’ve been priced reasonably adequately.”

Some P&C industry observers speculated two years ago about whether 2021 would wind up representing the salad days of the industry’s financial returns, with a reversion back to the mean being inevitable.

For example, Alister Campbell, president and CEO of the Property and Casualty Compensation Corporation (PACCIC), predicted in 2021 that the industry’s return on equity numbers, then around 17% to 18%, would probably be sliced in half over two years.

“Every single time that insurers have reported such above-average profits, competitive forces have quickly acted to cut the industry’s return on equity in half — to an average of 7.4% — within two years,” Campbell wrote in PACICC’s 2021 annual report.

Feature image courtesy of iStock.com/borchee