Commercial Claims: Canary in a Coal Mine?

Canada’s claims reality in 2007 is starting to catch up with the recent abundance of capital and concomitant rate decreases. Could this mean that the current ‘soft-market’ period may be reaching its apex, and the pendulum may start veering towards a hard market again? What’s happening right now in property lines — in particular, commercial property lines — may be our guide.

Even anecdotally, considering the natural catastrophes inflicted upon Canada thus far, one would have to think the personal property claims costs recorded in 2007 are already going to be more significant than anything seen in 2006. For example, B.C.’s winter storm clocked in at Cdn$242 million. Calgary’s flooding has cost insurers roughly Cdn$40 million, eight Manitoba tornadoes are reported to have caused uninsured damage figures of Cdn$600,000 (insured estimates were still being calculated at press time), and a recent fire in Edmonton has resulted in non-insured damages of Cdn$20-25 million. Call it a ballpark figure of Cdn$350 million for just four NatCat losses thus far in 2007 Q1, and we can see the damage losses starting to total up.

On the plus side, forecasters have downgraded their initially dire hurricane predictions for 2007, which is almost starting to become a seasonal event.

This year, Tropical Storm Risk (TSR) downgraded its hurricane forecast from 55% above-norm in June to 40% above-norm in July. According to a Benfield news release, the reason for the reduction is that the trade wind speed over the tropical North Atlantic in August-September will be stronger than previously thought. TSR says the increase in the trade wind speed, which would have the effect of suppressing hurricanes, is because the La Nina event forecast for August-September is not as strong as initially thought.

Assuming TSR is correct in predicting a relatively more benign season than previously forecast, this might have positive implications for the amount of global capacity available in 2007-08. Although try telling that to reinsurers in the United Kingdom that have seen insured flood losses rise to beyond Cdn$4.27 billion.

In Canada, claims ratios in personal property have yo-yoed over the years, following the rise and fall of NatCats. But this year, at 63.98%, the claims ratio (net premiums divided by net claims) in the personal property area is higher than it has been in the first quarters of both 2005 (59.11%) and 2006 (55.3%).

Don’t forget this is in addition to auto losses, which are starting to increase, as both OSFI and A.M. Best figures suggest. In auto lines, the Canadian industry’s loss ratio increased to 67.7% from 64.6% in 2005. “This should signal to the market that further premium declines might not be prudent,” A.M. Best warned in a special report, adding that the rise in the auto loss ratio was due to a slight rise in the accident benefit costs. “The rise in accident benefit costs is somewhat concerning because one of the major initiatives from the auto reforms was to contain this rise through the adoption of evidence-based treatment for soft-tissue injuries. The industry would be in serious jeopardy if accident benefit costs were to escalate as they did in 2001-02.”

Another interesting phenomenon suggested in OSFI’s 2007 Q1 figures is the flip side of what we hear concerning commercial rates. It comes as no surprise to anyone reading the pages of this magazine over the past year that commercial property rates are falling. Time will tell whether they are falling too quickly, but the speed isn’t really the issues: Rates, generally, are going down.

At the same time rates are decreasing, OSFI figures show commercial property claims costs are on their way up. According to OSFI figures, net incurred claims costs in the commercial property area in 2005 Q1 amounted to Cdn$296.8 million and the claims ratio in this area was 52.58%. The following year, in 2006 Q1, net claims incurred amounted to Cdn$297.2 million and the claims ratio stood at 50.06%. Now, in 2007 Q1, net commercial claims ballooned to Cdn$385.2 million and the claims ratio in this area has escalated to 64.11%

This is happening despite the fact that net premiums earned in the commercial property sector have increased year over year. So we have increasing claims and decreasing rates in the commercial property sector. We might thus look at what’s happening in Canada’s commercial property insurance market right now as a kind of ‘canary-in-the coal-mine’ test case of when the hard market might arrive. One wonders how long this commercial rate-cutting can last in an environment of rising claims costs before, like Wile. E. Coyote in the Bugs Bunny cartoons, the industry realizes it is suspended in mid-air, and braces for a crashing fall down a cliff.