Despite the challenges and fluctuations of 2015 – including plummeting oil prices – Canada’s property and casualty industry “had a relatively good year,” with underwriting income tripling to about $1.7 billion, David McGown, senior vice president of strategic initiatives for Insurance Bureau of Canada (IBC), said Wednesday during Swiss Re’s 2016 Canadian Insurance Outlook.
“Underwriting income improved to about $1.7 billion from $558 million in 2014,” McGown told a capacity crowd assembled for the 31st edition of Swiss Re’s annual event in downtown Toronto. “Canada’s p&c insurance industry delivered solid results despite both volatile market conditions and continued low interest rates,” he suggested.
“Less severe weather gave us a break for the second year in a row. And the result was an improvement in the national loss ratio to 65% from 68% the previous year,” McGown told attendees.
“Underwriting results in 2015 brought a surprise: it was the first time in at least 15 years that personal insurers generally outperformed commercial insurers,” he reported. In terms of combined ratio, personal insurers as a group posted a combined ratio of 98%, while companies specializing in commercial property and liability insurance posted a combined ratio more than 100%, he said.
McGown (pictured left) noted that, compared to 2014, loss ratios for personal property improved by about 8 percentage points and by approximately 7 percentage points for commercial property, while there was a slight improvement in private passenger auto insurance.
“For the property insurance business, the telling story nationally is the decline in insured losses from natural catastrophe events,” he said, pointing out that the $600 million in insured losses from natural catastrophes last year represented “the first time since 2009 that such losses were well below $1 billion.”
But because insured losses from nat-cats are documented only when they reach $25 million masks the financial impact of smaller-scale weather events, McGown of IBC suggested. “This was illustrated in Nova Scotia, where the combination of many smaller events contributed to higher loss ratios for personal and commercial property. In particular, the commercial property loss ratio jumped to 119%, leading to a significant underwriting loss for the province,” he told attendees.
As for private passenger auto insurance, which accounts for 40% of all written premiums in Canada, McGown said the slight improvement in the nationwide loss ratio for auto was as a result of better performance in Ontario and Alberta.
“In Ontario, the loss ratio improved by 4 percentage points to just over 71%, due to lower liability claims costs. However, the accident benefits loss ratio deteriorated to 89%,” he reported. “And these results do not incorporate the impact of the 2015 reforms and the mandated rate reductions, which will roll out over this year and next,” he added.
As for Alberta, McGown said, the auto loss ratio at the end of 2015 was 82%, reflecting improvements across the market except for accident benefits. And in Atlantic Canada, the “auto loss ratio reached an unsustainable 90%.”
McGown noted that over the past 25 years, auto’s share of business has steadily declined from 52% to 45%. Although there is likely no single answer as to why, he said provincial reforms implemented since the early-2000s have reduced claims costs and premiums, and there has been more rapid growth in other market segments. “But I believe that one crucial factor is strict price regulation, which is practiced in every provincial market where our companies do business,” he said.
While the industry’s picture was not so rosy on the investment side, “growth in underwriting income more than offset those lower investment returns,” with the industry witnessing higher return on equity (ROE) and increased capital ratio.
“ROE now stands at 10.2%, which is in line with industry’s long-term average,” McGown said, adding that “the industry-wide capital ratio increased, which again confirms our industry’s continued stability even during challenging economic times.”
McGown cited comments by Gregor Robinson (pictured right), IBC’s then senior vice president of policy and chief economist, during last year’s Swiss Re Canadian Outlook, regarding falling oil prices: “It is likely going to be the single biggest influence on the global and Canadian economies for the next two years.”
That prediction proved accurate, McGown told attendees of this year’s event, pointing out that plummeting oil prices have since contributed to lower real domestic income, lower profits, reduced business investment and a lower Canadian dollar. As well, Canada last year also experienced contraction in economic growth in the first half of the year, falling government revenues and a rise in deficits, and overall growth of only 1.2%, less than half of what it was a year earlier.
“Continued low oil prices will put a damper on business investment, economic growth and employment across the country,” McGown suggested. “Predictions for 2017, while a bit more optimistic, will differ from province to province – and are not exactly rosy,” he noted.
Times are changing and disruptions and innovations are unfolding. “Now may be the right time to ask, ‘Who out there is interested in disrupting this industry – the p&c insurance industry in Canada?’” McGown said.
“Disruption within the banking industry is often held up as an example of what is coming for ours,” he told attendees. “But there may be reasons why our industry may not lend itself to disruption quite as easily as others,” he said.
“Unlike banking, insurance doesn’t have any unregulated revenue streams involving high-margin transactions. There are no equivalents to banking fees ripe for the picking. And to write an insurance contract, you pretty much have to be a regulated insurer. The barriers to entry remain high,” he argued.
That said, the barriers are not insurmountable, McGown pointed out. Approaches such as peer-to-peer or rethinking insurance from a customer’s point of view may not change the business model of traditional insurance, he suggested.
What is clear, however, “is that innovators and disruptors are pushing the model, and the pressure to adapt is gaining traction. It’s evolving and evolving quickly.”