MarketPlace

Canadian Market

Auto loss ratios improve in 2011 Q3, but property lines loss ratios deteriorate

Automobile personal accident lines showed a huge improvement in 2011 Q3 compared to the same period last year, according to figures released by the Office of the Superintendent of Financial Institutions (OSFI).

During 2010 Q3, Canadian insurers automobile private passenger personal accident lines stood at 125.4%. Over the same period this year, after Ontario introduced its auto insurance reforms, the claims ratio had been shaved down to 75.67%

Foreign insurers had a claims ratio of 220.57% in auto personal accident lines in 2010 Q3, a figure that had almost been halved (to 129.16%) in 2011 Q3.

But while claims ratios have come down in auto personal accident lines, claims ratios have increased in personal and commercial property lines, according to OSFI figures.

Claims ratios for Canadian insurers in personal property lines increased from 66.04% in 2010 Q3 to 72.86% in 2011 Q3. Claims ratios in commercial property also increased, from 63.89% in 2010 Q3 to 74.49% during the same period this year.

Foreign insurers also saw their claims ratios increase, both in personal property lines (from 60.58% in 2010 Q3 to 65.71%) and in commercial property lines (from 70.95% in 2010 Q3 to 82.42% in 2011 Q3).

Consolidation, banks’ market entry eat into broker share in Canadian P&C marketplace

The brokers’ share in the distribution of personal P&C insurance in the Canadian marketplace will likely drop from 69% of the policies distributed in 2009 to a 50-50 split with their direct counterparts in the near future, said Lubo Li, senior director and practice leader at JD Power and Associates.

Li discussed the major drivers of the shifting Canadian personal P&C insurance marketplace during KPMG’s Annual Insurance Issues Conference in Toronto on Nov. 24.

The accelerated pace of insurer consolidation and the banks’ entry into the market are among the primary drivers of the shifting landscape, Li said.

“If you look at the data from 30 years ago, just about one-third of personal policies sold in Canada were by the Top 10 insurers,” he said. “By 2009, the market share of the Top 10 insurers jumped to nearly 60%.

“So this change has shifted the bargaining power to the mega-insurers emerging at the expense of the independent agent or brokers, and [that has] allowed insurers to either build or grow their direct-to-consumer channels.”

The second most important driver of change is the entrance into the personal P&C space by the major banks in Canada, Li said. Banks generally distribute their policies through the direct channel.

Regulation

Insurers vulnerable to financial crisis as they branch out into non-insurance financial products

The traditional insurance model has allowed property and casualty insurers to withstand the recent financial crisis, according to a paper by the International Association of Insurance Supervisors (IAIS). But as insurers branch out from this model and offer more non-insurance related products, they are more vulnerable to financial risks associated with the crisis.

The association of international insurance regulators released the paper, entitled Insurance and Financial Stability, on Nov. 15. It says the recent financial crisis demonstrated that the traditional insurance business model has allowed the majority of insurers to withstand the crisis “considerably well.”

However, the paper adds: “The financial crisis revealed that insurance groups and conglomerates operating in traditional lines of business may suffer considerable distress and become globally systemically important when they expand significantly in non-traditional and non-insurance activities.”

The paper goes on to describe how insurance groups and conglomerates that engage in non-traditional or non-insurance activities are more vulnerable to financial market developments and thus more likely to amplify, or contribute to, systemic risk.
“Examples of such non-traditional and non-insurance activities include credit default swaps (CDS) transactions for non-hedging purposes or leveraging assets to enhance investment returns,” it says.

European economic turmoil increasing uncertainty around Solvency II implementation

Recent economic turmoil in Europe has further exacerbated the delay and uncertainty of the implementation date of Solvency II, potentially creating a huge strain on companies during 2013, said Nick Dexter, a partner in KPMG’s U.K. operations.

Dexter offered a Solvency II update during KPMG’s 20th Annual Insurance Issues Conference in Toronto on Nov. 24.

The original implementation date of Jan. 31, 2012 has been pushed back to Jan. 31, 2013. And now there is talk of extending the deadline another year to Jan. 31, 2014, Dexter said.

Regulators will be required to use Solvency II from the 2013 implementation date, but firms won’t have to comply until 2014. “So, you can imagine what that means for 2013,” Dexter said. “It means that firms will be still developing [their Solvency II systems], but the regulators can at any time during 2013 ask them for numbers on a Solvency II basis.

“It also means companies can’t switch off their Solvency I-style calculations because they won’t be rescinded during 2013. And because of IFRS, you might have to be running Solvency I numbers for a few years yet.

“So, the overload on companies to produce all of this is huge. 2013 is going to be quite chaotic.”

Claims

Alberta believes arson responsible for Slave Lake fires

Alberta officials believe arson was responsible for fires that gutted large portions of the community of Slave Lake,
Alberta.

The fires on May 14 resulted in more than $700 million in insured damages, the second most costly
insured loss in Canadian history. The fires destroyed 4,700 hectares, about 400 structures and forced the evacuation of 7,000
residents.

“Our investigation into the origin of that fire ruled out everything but arson as a probable cause,” Frank Oberle, Alberta’s Sustainable Resource Development minister, said in a release. “As a result, we have delivered our findings to the RCMP to determine if a criminal investigation is the next step.”

The investigation into the cause of the Slave Lake wildfire took five months to complete and involved extensive onsite and offsite work to gather evidence according to internationally accepted standards for wildfire investigations, the release says.

According to the release, about half of the 1,600 wildfires that typically ignite in the FPA each year are caused by lightning strikes; the other half arise from human actions such as unattended campfires, debris burning and industrial activity like gas flaring or slash burning.