Canadian P&C industry must heed lessons of past soft markets, A.M. Best warns

The Canadian property and casualty industry posted excellent results in 2006, sporting a 91.7% combined ratio and a 17% return on equity (ROE), but it should be mindful of the lessons learned from soft markets in the past as 2007-08 results are expected to deteriorate, A.M. Best warned in a recent report.
The A.M. Best report, entitled “Canadian Property And Casualty Insurers Should Heed The Past To Avoid Market Instability,” available on Ratings Direct, noted the Canadian P&C industry remains well-capitalized, with a minimum capital test ratio of about 250% for 2006.
“Although these results are impressive, especially considering this is the third straight year industry returns have been very strong, we expect them to weaken for the rest of 2007 and 2008,” A.M. Best noted. “With more than 200 industry participants, the market is as competitive as ever and there’s always the temptation for companies to cut pricing to increase market share, especially if they feel the current operating environment and conditions are sustainable.”
The report notes the Canadian insurance industry benefited in 2006 from a low claims frequency and favorable weather patterns. These conditions have “offset the need for rate increases and may have created a false sense of security in the sustainability of results,” A.M. Best says.
There are clear indications that the market is experiencing “softness” and claims costs are rising, the report continues.
“This will ultimately lead to a deterioration of results. Given the cyclical nature of the P&C industry, turmoil similar to what the industry faced in 2001-2002 is possible if it’s not mindful of the past.”
In auto lines, the report notes the Canadian industry’s loss ratio increased to 67.7% from 64.6% in 2005. “This should signal to the market that further premium declines might not be prudent.”
Moreover, A.M. Best notes the rise in the auto loss ratio was due to a slight rise in the accident benefit costs. “In Alberta, for instance, the average accident benefit cost per claim rose about 7.1%, while in Ontario it rose 1.5% in 2006,” the report notes. “The rise in accident benefit costs is somewhat concerning because one of the major initiatives from the auto reforms was to contain this rise through the adoption of evidence-based treatment for soft tissue injuries.
“The industry would be in serious jeopardy if accident benefit costs were to escalate as they did in 2001-2002.”