March 18, 2004 by Canadian Underwriter
Canadian property and casualty insurers posted impressive net income for 2003 of $2.63 billion, up from just $340 million in 2002. Revised yearend figures from the Insurance Bureau of Canada (IBC) point to a return on equity (ROE) of 11.32% (2002:1.7%) on a combined ratio of 98.7% (2002 105.8%).
This represents just an average year for ROE, however, notes IBC chief economist Jane Voll. “The industry’s rate of returnremains lower than reasonable profitability targets accepted by government regulators and lower than levels seen in other financial services.” For example, the “big six” banks posted average profit of $1.8 billion, while each of the 207 insurers posted average profit of just $13 million.
Direct written premiums in 2003 were up to $35.9 billion (2002: $29.8 billion), and net premiums earned hit $30.5 billion (2002: $25.3 billion).
While claims costs also grew, to $21.4 billion (2002: $19.5 billion), the industry’s loss ratio fell to 70.2% (2002: 76.9%). Overall, insurers turned in an underwriting profit of $548 million, versus an underwriting loss of $1.4 billion in 2002.
Investment gains grew significantly in 2003, to $709 million, up from $69 million in 2002. The industry’s investment yield for 2003 was 6.3% (2002: 5.4%).
Despite the significant turnaround evidenced by the 2003 results overall, problem areas remain, specifically in private passenger automobile. While the auto loss ratio fell last year to 89.6% from 96.6% in 2002, this remains unacceptably high, the IBC maintains. “The p&c insurance industry may have turned the corner, but remains a long way from home,” says Voll.
Perhaps the most difficult issue is with the Facility Association (FA), the industry’s pool for high-risk drivers. Last year, the FA posted a loss of $550 million, double the loss produced by the B.C. forest fires last summer, which rank as the third-worst natural disaster ever for Canadian insurers. FA marketshare has grown in all jurisdictions, particularly in Nova Scotia where between 2000 and 2003 it jumped from 1.1% to 7.7% marketshare. The FA is seeing progress in New Brunswick where its marketshare fell from 6.5% to 4.7% over the course of 2003. The IBC says more work is needed to ensure FA rates are not competitive with the voluntary market.
Nonetheless, investors seem to recognize progress in the p&c market. 2003 saw $500 million in new capital injected into the Canadian industry. “Ultimately, in order to keep this capital within the industry, investors will need to earn returns comparable with other investment opportunities,” Voll concludes.