Outlook: Markets to harden further in 2009

Canada’s property and casualty insurance market will continue to harden in 2009 as insurers look to prop up eroding capital levels, according to industry experts.

“All of the underlying drivers point to further and broader market hardening extending into casualty and primary commercial lines,” said Brian Gray, chief underwriting officer at the Swiss Reinsurance Company, speaking at the 24th annual Canadian Insurance Outlook Breakfast meeting in Toronto yesterday. He pointed out that industry solvency ratios “took a very sharp drop off in 2008” after several years of strengthening, and that industry capital has shifted “from excess to tight.” At the same time, “raising capital is prohibitively expensive, if available at all,” he said.

One of the key reasons for the erosion of capital was a severe decline in underwriting income.

“The big story in 2008 is the story of claims costs running ahead of premium growth,” said Barbara Sulzenko-Laurie, vice president, policy with the Insurance Bureau of Canada (IBC). “For first time since 2002 there’s an underwriting loss,” she added, referring to the 114% decline in underwriting income from the previous year. She noted that only 47% of Canadian companies had an underwriting profit in 2008. “That contrasts dramatically with the 70% of companies with an underwriting profit in 2007,” she said.

Another factor behind the drop in capital has been falling investment returns. Sulzenko-Laurie pointed to the drop in investment returns-from a 5.9% return on investment in 2007 to a 3.7% return in 2008-to illustrate this point.

“One possible place to raise capital is on the investment side, but yields are at historic lows,” said Gray. “If earnings won’t come from investment side, they must come from underwriting,” he added.

While Canadian P&C insurers remain well capitalized, Sulzenko-Laurie noted that constitutional challenges to minor auto injury regulations in Alberta and the Maritime provinces pose further risks to capital levels. “There is a whole lot of capital that’s at stake in the outcomes of these trials,” she said, adding that we will have to wait two to three years to get a ruling from the Supreme Court.”

Government inaction on Ontario’s auto insurance regime is also a growing threat to the industry, said Sulzenko-Laurie. She estimates the loss for Ontario’s “abusive and excessive” auto accident benefits system at $390 million in 2008, with the loss ratio climbing from 103% to 124% during that time.

“Obviously the Ontario government has a lot of catching up to do,” she said.

This story was originally published by Canadian Insurance Top Broker.