How Canada’s P&C insurers are faring under IFRS 17

Despite significant changes to financial statements from IFRS 17, 2023 is shaping up to be an “average” year at best for Canada’s P&C insurers, even as continued Cat events remain likely to negatively impact Q3, says a new report.

In the first six months of 2023, PACICC recorded 31 member insurers with negative net income (i.e., losses). This is 18% of PACICC’s 168 member insurers — within the ‘normal’ range for the industry, said Grant Kelly, chief economist and vice president of financial analysis and regulatory affairs at the Property and Casualty Insurance Compensation Corporation (PACICC).

Kelly summed up the industry’s financial state in the latest quarterly edition of Solvency Matters, released Thursday.

“In fact, over the past five years, on average, 31.6 insurers report losses each year — so, the first six months of 2023 are exactly average by this measure,” he wrote. “The question facing regulators (and PACICC) is always whether the financial losses of these insurers represent a temporary blip that can be quickly corrected, or are part of a longer trend of losses that erode capital and undermine business and consumer confidence.”

PACICC also examined insurers’ two primary sources of income: underwriting (selling insurance) and investing. Of the approximately 170 member insurers that reported results in 2023 H1, 127 reported positive income in both Insurance Results and Investment Results. Insurance Results is a new IFRS 17 term, replacing Underwriting Profit/Loss.

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Another 25 insurers reported their negative Insurance Results were offset by profits on their investments. Nine insurers reported negative investment results, but all of them reported positive insurance results. “This means that no PACICC member insurer reported both negative Insurance Results and Investment Results in the first six months of 2023,” Kelly wrote.

In other results, Canada’s P&C insurers collected 9.4% more in revenue than in the same period in 2022 and also paid out 10.4% less in claims and related expenses. This resulted in an improvement in the industry’s Insurance Service Result, which rose to $4.37 billion, 4% higher than the first half of 2022.

In IFRS 17, Insurance Revenue represents the total value of premiums collected by insurers. “It is comparable, but not the same, as what used to be called Gross Written Premiums (in some ways more similar to what was once known as Earned Premiums),” Kelly explained. Insurance Services Expense represents the money paid to settle claims and related expenses.

In personal property, the “Net Insurance Service Ratio” (NISR) — similar to the old loss ratio, but produces higher numbers as it now also includes acquisition expenses, including commissions and reinsurance, as well as the impact of onerous contracts — was 94.1%. NISR for auto was 92.7%, and stronger for commercial lines: 86.1% for commercial property and 82.3% for commercial liability.

One year ago, the industry’s investment results were at an all-time low, with the industry’s bond portfolios negatively impacted by the dramatic and rapid increase in interest rates. As interest rates have steadied, that negative impact has lessened, with investment returns rebounding to a more normal annualized rate of 3.5%.

Improved underwriting and stronger investment results have led to a 144% increase in the industry’s net income. This translates to an annualized return on equity of 11.6% — in line with the industry’s pre-IFRS 17 long-run average ROE.

“While it is ‘early days’ yet, with much transition work still lying ahead (including key decisions around corporate accounting/reporting policies at year-end), Canada’s P&C insurers appear to have successfully made the transition to the new IFRS 17 financial reporting standard,” Kelly wrote.

And although it’s taking time to develop new, industry-wide performance metrics, “the fundamentals haven’t changed,” Kelly wrote in PACICC’s quarterly . “Sustained underwriting profitability and prudent levels of capital remain the critical benchmarks that PACICC will continue to monitor at a member and industry level.”

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