Canadian insurers end 2001 on dismal financial note

Canadian property and casualty insurers ended the 2001 financial year with a meager 3% return on equity, with the final quarter industry results showing little improvement over the earlier part of the year with a 0.5% ROE, according to just released Insurance Bureau of Canada (IBC) data.
Speaking at the Swiss Reinsurance Co. Canada’s annual Statistical Breakfast seminar, the IBC’s chief economist Paul Kovacs describes the financial environment facing insurers as being "challenging times". He adds, "this is the lowest ROE [based on 2001 results] for the industry, this is simply the worst [year] ever."
Although net premiums written and earned by the industry in the final quarter of 2001 show signs of strengthened pricing, the overall gains made in these areas for the full year were tempered somewhat with net premiums written rising 10.4% year-on-year, and net premiums earned up by 7.8%. The industry’s greatest weakness lies in runaway claims costs, Kovacs notes, with claims incurred in the fourth quarter climbing by 12.6% to $4.4 billion (4-Q 2000: $3.9 billion) while the claims expense for the full year rose by 11.7% to $16.2 billion (2000: $14.5 billion). This cost pressure boosted the industry’s combined ratio for 2001 to 110.3% compared with 108.4% from the previous year. The combined ratio for the fourth quarter of last year clocked in at 114.2% against the 112.8% shown for the same period a year prior. "For insurers, the priority needs to be material improvement in underwriting performance and profitability."
Specifically, Kovacs says the underwriting losses suffered by the industry are pronounced in personal lines of Atlantic Canada, as well as the auto markets in Alberta and Ontario. Much of the latter cost relates to auto accident related injuries, particularly soft tissue treatment, which the IBC is currently involved in negotiations with the provincial governments to bring about product reform. "Governments have not yet given the industry authority to manage and control its healthcare expenses and medical claims. These costs have been rising by 14% a year for more than a decade."
Notably, the decease in industry profitability, combined with plummeting investment values, has seen a significant increase in the number of insurers failing the minimum asset test (MAT). The number of MAT failures over the past year rose from about five to nine companies, with nearly 60% of all insurers reporting to the IBC that they had incurred an unfavorable claims reserve development during 2001. Part of the drop in the industry’s earnings for 2001 came about due to the fact that companies had to shore up their reserves to counter this unfavorable development position, Kovacs says.
Overall, insurers finished 2001 with an underwriting loss of $1.9 billion, reflecting a 26.8% year-on-year worsening, while total investment income dropped by 13% to $2.86 billion. The drop on the investment side resulted mainly from a 43.4% decrease in investment gains which amounted to $581 million for 2001 against the $1 billion reported at the end of 2000. As a result, the industry finished 2001 with a net profit of $581 million compared with the $1.2 billion made during the previous year. "The focus has to be on underwriting, and there’s going to be pricing adjustments, but this [building an industry recovery] is also going to involve a lot of components," says Kovacs.