Still standing

When Elton John sings his famous pop tune, ‘I’m Still Standing,’ he could well be describing Canada’s P&C insurance industry at the end of 2020 Q2 — the dreaded COVID-19 financial quarter.

“Canada’s property and casualty (P&C) insurance industry has survived the first six months of 2020,” states Grant Kelly, the vice president of financial analysis & regulatory affairs and chief economist of the Property and Casualty Insurance Compensation Corporation (PACICC).

“Collectively, the 195 individual insurers that comprise the industry reported a return on equity (ROE) of 4.9% in the first six months of 2020,” as Kelly reports in PACICC’s September 2020 newsletter, Solvency Matters.

While that may not seem like much, it’s a significant achievement for Canada’s federally-regulated insurers to post a collective industry profit of $898.5 million in 2020 Q2. This happened during a once-in-100-year pandemic event that has caused one of the deepest economic recessions since the Great Depression of the 1930s, although it is arguable that the 2020 pandemic recession will last as long.

In fact, the industry’s profit during this past quarter was up from the $391.5-million profit it recorded in 2019 Q2, when the industry posted an even lower ROE of 4.6%.

The industry also managed to shrink its combined ratio (COR), another measure of insurers’ profitability, from 103.2% during the second quarter last year down to 102.5% this year. That still shows the industry is losing money (numbers above 100% show a loss, whereas numbers below 100% show a profit), but that’s still impressive given the nearly $2 billion in natural catastrophe claims losses that insurers racked up in Alberta alone this spring and summer.

Another piece of good news: The industry’s capital position remains strong. “The industry’s overall MCT (minimal capital test) score for the first half of 2020 was 234.2%,” Kelly wrote. “This means that insurers are holding $2.34 in assets for every dollar of liabilities on their balance sheets. This is only marginally different than the 236.9% MCT posted at the end of 2019.”

If the industry finds strength in these numbers, it’s because COVID-19 did a number on the industry’s balance sheets and claims costs.

For example, although the industry took in $3.2 billion more in total underwriting revenue in 2020 Q2 than it did last year, it still reported a higher underwriting loss, according to financial figures posted by Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI).

Canada’s federally-regulated insurers reported a 2020 Q2 underwriting loss of $893 million, as opposed to an $804.5-million underwriting loss during the same period last year.

Some commentators note that the P&C industry was spared from a worse financial fate because government lockdowns caused people to work from their homes and keep their cars parked.

Home insurance, for example, saw loss ratios drop from 63.7% in 2019 to 58.9% in 2020. And in auto lines, the total loss ratio for private passenger and commercial vehicles decreased from 78.3% in 2019 Q2 to 75.8% in 2020 Q2, according to OSFI.

But the pandemic wreaked havoc in most commercial liability lines, mainly  due to lawsuits related to pandemic exclusions in commercial policies.

Overall, the loss ratio for commercial liability insurance spiked dramatically from 65.4% in 2019 to 86.6% in 2020.

Some commercial lines were hit harder than others. In cyber liability, for example, the loss ratio skyrocketed up to 498.9% in 2020 Q2, reflecting the reality that employees are working remotely — and digitally — from home to prevent the spread of the virus. Industry observers link the higher claims activity to a marked increase in phishing and social engineering attacks by cybercriminals.

Also, CGL liability loss ratios are up. With products, the CGL liability line featured a loss ratio of 95.8%, up significantly from 65.9% over the same period last year. And CGL policies without products reported an unprofitable loss ratio exceeding 112%. That’s almost double what it was during the same time last year, when it was only 60.6%.

Feature image via iStock.com/ianmcdonnell