December 18, 2019 by Jason Contant
Canada’s property and casualty insurers posted moderate profitability in the first nine months of 2019, but poor underwriting results and high loss ratios linger, notes an executive from the Property and Casualty Insurance Compensation Corporation (PACICC).
For Q3 2019 year-to-date (as of Nov. 25), the industry’s average return on equity (ROE) was 6.3%, up from 5.2% in the same period in 2018, according to statistics from MSA Research. The industry’s long-run average ROE is 10%.
But these profits were not spread equally across all insurers, wrote Grant Kelly, chief economist and vice president of financial analysis & regulatory affairs at PACICC, in Solvency Matters, the corporation’s latest quarterly report on solvency issues affecting P&C insurers in Canada.
“There are more than 20 insurers that posted unsustainable underwriting results, by which we mean underwriting losses representing a drain on the capital base of these insurers,” Kelly wrote in the article Solvency Analysis. “Of course, properly capitalized insurers can weather temporarily poor results, but mitigating actions are urgently required.”
This “moderate improvement in still inadequate returns” is driven entirely by an increase in investment income, likely a result of the recent material downward shift in interest rates (and thus not repeatable), Kelly wrote. “In fact, core underwriting results have not yet improved at all, despite substantial increases in premiums written.”
The main cause of these poor underwriting results continues to be high loss ratios in private passenger auto insurance. In the current low interest rate environment, industry loss ratios higher than 80% simply do not allow insurers to pay operating expenses and replenish their capital base, Kelly explained.
In 2019, the private passenger loss ratios of 87.1% in Nova Scotia, 87.9% in New Brunswick, 81.9% in Ontario and 84.9% in Alberta all represent capital drains for insurers.
“The best-case outcome for insurance consumers in these markets would be product reform,” Kelly wrote. “However, it remains unclear that these products would be reformed before increased costs must be passed through to consumers in the form of higher premiums.”
According to the MSA Research statistics cited in the article, Q3 2019 return on investment was 3.7%, compared to 2.2% in Q3 2018. The combined ratio was 100% for the latest quarter, up 0.3% from 99.7% for the same period one year ago.