Canadian insurance industry could lose up to Cdn$1 billion in profits in 2008

The Canadian insurance industry’s financial health will start to decline in 2008, and there may be “financial failures this year” if companies don’t rely on solid underwriting results to bail them out, warns Chubb Insurance Company of Canada CEO Ellen Moore.
Speaking at a Toronto Insurance Women’s Association (TIWA) meeting at the Toronto Board of Trade, Moore noted that although she expects the Canadian insurance industry to be profitable in 2008, the industry’s profits could decrease by as much as Cdn$1 billion by then end of this year. That would be a 25% loss in profit over the span of one year, she observed.
Moore presented a slide indicating that, despite two straight years of comparatively low claims activity, many companies in Canada’s insurance industry have Financial Strength Ratings of no better than a ‘BBB,’ which is a middling grade.
“A lot of our market is hovering in the middle range,” she noted, adding that bond issuers helped bail out some of the poor results in 2007. “As an insurance industry, that has to give us a bit of pause. There are going to be a couple of financial failures out there this year if not bailed out significantly by other means.”
Moore noted companies’ return on equity (ROE) generally trails the cost of capital. She observed industry analysts are suggesting that, for insurers to keep the growth capital they require, companies must achieve ROEs of at least 15% at the height of the market.
In turn, to achieve this, companies must show a combined operating ratio of about 90%-92%. “Current pricing trends, at least in commercial lines, suggest that will be a little bit of an issue,” she said.
Moore predicted that in 2008 there would be a number of companies with COR ratings of higher than 100%, “which we didn’t have last year.”
Aside from decreasing rates in a soft market, Moore believed financial results in 2008 would most likely be affected by:
the diminishing impact of auto reforms;
consumers’ attitudes, in the sense they are now less likely not to report minor auto claims;
increasing number of weather-related claims; and
a shifting legal climate, featuring an increasing number of class action lawsuits.