B.C. earthquake exposure presents opportunity for insurance carriers as some drop coverage

Earthquake risk in British Columbia is a “pocket of opportunity” for global insurers, as some carriers have “curtailed” writings while insured values are increasing, suggests a new report from Aon Benfield.

The reinsurance division of London-based Aon plc announced Sunday the release of its 2013 Insurance Risk Study, which included several statistics on each of 50 property and casualty insurance markets. It also included in-depth studies on six countries, including Canada, in order to “identify potential growth opportunities.”

The studies on those six countries “combine demographic, economic, sociological and political information with insurance data insights,” Aon Benfield said. The other five countries included in the in-depth studies were Colombia, Indonesia, Malaysia, Mexico and Turkey.

Canada, Malaysia and Indonesia had five-year combined ratios below 100%, Aon Benfield noted, adding that while Canada’s five-year annualized gross domestic product growth rate was 2.8%, the rates for Indonesia and Malaysia were 7.7% and 5.9% respectively.

Canada had the eighth largest P&C market — behind the United States, Japan, China, Germany, Britain, France and South Korea — when measured by gross written premiums. The study reported Canada had US$41.9 billion a year in P&C GWP, while GWP for the seven largest markets ranged from US$503.3 billion in the U.S. to US$53.3 billion in South Korea.

The study also reported, for the 50 largest P&C markets, the annualized premium growth, cumulative net combined ratio, cumulative net loss ratio and cumulative net expense ratio for one, three and five years.

For Canada, annualized premium growth was 13.3%, 9.1% and 4.7% for one, three and five years respectively.

Cumulative net combined ratio in P&C in Canada was 99.1%, 100.7% and 98.8% for one, three and five years respectively. Cumulative net loss ratio was 70.8%, 72.1% and 70.4% for one, three and five years respectively. Cumulative net expense ratio was 28.3%, 28.6% and 28.4% for one, three and five years respectively.

In Canada, Aon Benfield noted, the auto market represents 45% of non-life premiums but is “very regulated and controlled in most provinces” other than Ontario and Alberta. The report also referred to Ontario’s private passenger auto regulations.

On Aug. 16, the Automobile Insurance Rate Stabilization Act (AIRSA) was amended to establish  “an industry-wide target reduction” by 15% of the “average of the authorized rates that may be charged by insurers” for private passenger auto, over two years. Now, when carriers ask the Financial Services Commission of Ontario for permission to change their rates, they must propose rates and a risk classification system “that contribute adequately to the achievement of” the 15% target.

“Companies are trying to grow via acquisition but this is difficult given strong capital levels and few opportunities available in the market,” Aon Benfield stated of Canada in its Insurance Risk Study. “Recent transactions have commanded a premium price. Nonetheless there are still pockets of opportunity.”

For example, Aon Benfield noted, British Columbia “has significant earthquake exposure and current writers have curtailed their writings.”

But there is “significant population growth” in BC. and insured values are increasing, Aon Benfield added.

“Pricing, deductibles and terms and conditions for the business are improving and insurers are applying more granular pricing of earthquake risks” in B.C., according to the study.

“There is also more demand for reinsurance due to regulatory capital requirements and the conservatism of local markets, which helps enforce market discipline,” Aon Benfield stated of Canada. “These pressures also mean that reinsurance presents an opportunity. Many companies are seeking a more diversified reinsurer panel and there are opportunities in the mid to upper layers of reinsurance.”

South of the border, Aon Benfield analyzed the market using data from the U.S. National Association of Insurance Commissioners. The study included statistics — including net combined ratio over the past 10 years — for several lines. For example, the combined ratio across all lines in the U.S. was 98%. It was 102% for private passenger auto, 94% for auto physical damage, 105% for homeowners and farm owners and 89% for product liability.

Worldwide, insurance premiums are US$4.9 trillion a year, of which P&C accounts for US$1.4 trillion. Within P&C, 45% of premiums are in auto, 32% are in property and 23% are in liability, Aon Benfield stated.

“Auto insurance is also the fastest growing segment globally, with premiums increasing 7.3% year-over-year, helped by substantial growth in China, followed by property at 5.9%, with liability lagging at only 0.6%.”