August 8, 2004 by Canadian Underwriter
The first release of the MSA Benchmark Report on Canadian p&c insurers highlights the struggles being experienced by auto writers compared to commercial insurance carriers.
The report’s author, MSA Research Inc.president Joel Baker, says that despite a return on equity of 9.2% for auto writer, when B.C.’s government insurer is excluded, this drops significantly to 7.2% (Baker notes in the report that it is difficult for private insurers to benchmark against ICBC because of its monopoly on basic auto coverage, thus the inclusion of results which exclude ICBC’s results). Significantly, the combined ratio for auto writers was just above 103% with or without ICBC’s inclusion, and the loss ratio actually dropped by 1.6% when ICBC was excluded. He adds that over the past five years, auto writers have turned in “an appalling” ROE of 3.7%, although results for 2004 should improve somewhat on rate increases made in 2003 before provincial auto reforms took effect.
While the Canadian market as a whole posted an ROE of 12.3% last year, on a combined ratio of 99.3%, Canadian-owned companies under-performed (ROE: 8.8% excluding ICBC) compared to branches owned by U.S. parents (ROE: 12.9%), European parents (ROE: 12.6%) and other foreign parents (ROE: 13.0%). Baker says many factors contributed to the under-performance of domestic insurers, namely that U.S. and European owned companies write more commercial lines business. In 2003, companies writing predominantly commercial lines posted an ROE of 15.3% on a combined ratio of 87.8%. But, Baker notes, over the past five years, Canadian-owned companies have actually posted better underwriting results than their U.S. and European owned counterparts.
Large companies were also significantly disadvantaged by their high proportion of auto business compared to small and mid-size carriers. Large writers posted an ROE of 5.4% on a combined ratio of 104.4% in 2003, while their medium-sized counterparts posted an ROE of 15.6% on a combined ratio of 95.7% and small carriers posted an ROE of 10.6% on a combined ratio of 97.5%. “In 2003, the top-five [largest writers] had higher loss ratios, higher adjustment expenses, higher acquisition costs and higher general expenses than either the next largest category or the mid-sized companies. Economies of scale have clearly not been demonstrated so far,” Baker comments.
Baker says the report is intended to be a companion to the MSA Report, which gives individual company data, and to act as a tool for gauging company results against peers. “Astute insurers will identify areas of under-performance versus their peers, then move mitigate or remedy those whether they be higher expenses, higher losses, business mix or what have you. They will also seek to consistently outperform their chosen “index” and demonstrate this achievement to various stakeholders.” More information can be found at www.msaresearch.com.