Serious But Stable Conditions

A boost in Ontario’s personal accident results and a discussion of how Solvency II might be a motive for mergers and acquisitions activity in Canada figured among many topics raised at the A.M. Best Company’s 2011 Insurance Market Briefing-Canada.

The briefing was held in Toronto on Sept. 8. Two property and casualty insurance seminars were scheduled. One covered off Canada’s primary insurance market, while the other addressed trends in the reinsurance market.

In the panel discussion on the primary market, panelists noted Ontario’s auto insurance reforms, introduced in September 2010, seem to have already had a buoyant effect on Ontario auto insurers’ auto results.
And on the reinsurance side, the disproportionate effect on smaller insurers of becoming compliant with Solvency II may in fact be a catalyst for M&A activity in the future, an A.M. Best panelist observed.

In a lead-up to the conference, A.M. Best published its annual report on the state of the union of Canadian P&C insurance, giving the industry a “stable” outlook for 2011-12. The report’s findings provided the backdrop for a panel discussion about the primary insurance industry.

A.M. Best Report: Canadian Industry Outlook

A.M. Best maintained a stable outlook for the Canadian property and casualty industry based on the industry’s strong risk-adjusted capitalization in 2010, stable investment income and the doubling of its comprehensive income between 2009 and 2010.

A.M. Best released its Review/Preview Report on the Canadian P/C & Life Markets in September 2010. The outlook expressed a belief that the number of future upgrades of individual Canadian property and casualty insurers would be balanced with the number of downgrades. The ratings agency observed that over the past five years, a majority (85%) of its actions related to the Canadian property and casualty industry have been affirmations. Ninety-seven per cent of rated P&C companies in Canada have secure ratings of B+ or higher, and 84% of companies had Superior (A++/A+) or Excellent (A/A-) ratings as of June 30, 2011.

A.M. Best noted the Canadian P&C industry’s financial results improved modestly in 2010. Adjusted net income increased by 3.7% to $2.3 billion, for example, and total comprehensive income rose to $3.3 billion.

But significant challenges for the industry remain. These include Ontario auto insurance fraud, the importance of insurance to value (ITV) following the wildfires in Slave Lake, Alberta and pricing adequacy in property lines (most notably commercial property).

In terms of challenges, A.M. Best expressed concerns about the ongoing efficacy of the Ontario auto reforms
introduced in September 2010.

“A.M. Best remains concerned that pricing – with potential regulatory intervention if escalation [of rates] continues beyond regulators’ comfort levels – and reserving for these new coverages may challenge and negatively affect insurers’ future underwriting profitability,” the report says.””A.M. Best also remains particularly concerned with the level of auto insurance fraud in the system, and whether reforms will curb these dealings.”

In addition, the industry faces a number of ongoing challenges in property lines related to price adequacy, weather-related claims and scrutiny of insurance to value (ITV).

“Based on recent weather-related events and the Slave Lake fires [in 2011], A.M. Best anticipates slight deterioration in the 2011 property loss ratio,” the report says.

Ontario Auto on the Rise

Ontario’s personal auto accident results are already showing signs of a drastic improvement, one year after the implementation of the reforms.

Jeff Mango, assistant vice president at A.M. Best, offered his thoughts on the effectiveness of the auto reforms during A.M. Best Company’s 2011 Insurance Market Briefing-Canada.

The loss ratio for Ontario’s personal auto accident lines had soared to 143.3% in 2010, Mango noted. But by the end of the first half of 2011, that figure plummeted to an estimated 84.3%.

Mango described the 2010 results as “horrific.” He said the results were made worse in part because plaintiffs’ counsel and health care providers were trying to file claims in advance of the Sept. 1, 2010 implementation of Ontario’s auto insurance reforms.

“We’ve been talking to a lot of companies that just saw an exponential spike in claims activity [before Sept 1, 2010],” he said. “You know reforms are coming, so plaintiffs’ counsel and folks on the medical side tried to get their claims pushed through beforehand. We’ve seen these dramatic spikes in claims activity in U.S. jurisdictions with impending reforms.”

Mango also attributed the improvement to stricter underwriting discipline and pricing by insurers; an improved regulatory framework; and an aggressive approach to tackle fraud within the system.

“Getting rate through the market is one thing, but there’s going to be a saturation point where consumer confidence won’t allow any more rate activity,” he continued. “So, rate can go up to a certain point, but it’s additional regulations and additional aggressive activities that are really going to take the auto results to the next level.”

Solvency II and M&A

The disproportionate effect on smaller reinsurers of trying to become compliant with the requirements of Solvency II may lead to future M&A activity, according to reinsurance panelist Gale Guerra, senior financial analyst at A.M. Best Company.

In the global reinsurance market, Solvency II is at the top of reinsurers’ regulatory agenda, Guerra noted. And meeting the steep requirements under Solvency II will likely pose a much larger challenge to smaller reinsurers.

“This could be a motive for M&A activity for the larger companies with the resources to become Solvency II compliant,” Guerra told the audience of 250 delegates. “Smaller companies with fewer resources may find they have some vulnerabilities in meeting the requirements and some of the larger companies may jump on that.”

The Office of the Superintendent of Financial Institutions has said it is taking a wait-and-see approach before deciding which, if any, elements of Solvency II it will incorporate into Canada’s regulatory regime. But that doesn’t necessarily mean Canadian reinsurers will be spared.

“Solvency II doesn’t directly impact Canadian insurers and reinsurers,” Guerra said. “However, I think because the Canadian reinsurance market has quite a few global reinsurers, and the Canadian operations are a subset, I think the European parent companies will impose some of the Solvency II requirements on their Canadian subsidiaries.”