Competition and soft rates challenge commercial property market

Underwriting within the Canadian commercial property segment during 2005 saw a sharp increase in net loss ratio, dampening overall industry results.
Events that contributed to the poor results include the Suncor Oil Sands Facility and increased storm activity throughout the country including a catastrophic storm in Ontario, according to A.M. Best Ratings Co.
Additionally, A.M. Best says the back-to-back hurricanes in the Gulf Coast region of the US had a negative impact on Canadian commercial writers who had an “appetite for international risks.”
The Suncor fire was the costliest man-made disaster in Canada with property damage, and business interruption losses, totaling approximately CD$1.2 billion, A.M. Best reports. In addition, the rating agency says commercial property results were impacted by severe weather that resulted in sizable losses in various provinces.
The largest of these was the Ontario storm that accounted for approximately CD$500 million in losses. Furthermore, A.M. Best says commercial property writers saw increased competition and rate softening particularly in larger commercial accounts.
The commercial property segment accounted for 14% of all direct premiums written in Canada, which is nearly identical to premium volume a year earlier, A.M. Best reports.
However, net loss experience sharply increased approximately 27 points, pushing the commercial property segment’s net loss ratio up to 70.2 from 43.5 in 2004.
Net premiums written totaled CD$4.6 billion, reflecting a modest decrease of 1.2% when compared to 2004.The drop, A.M. Best says, is attributed to rate softening in the commercial sector and increased competition.
Despite sizable losses in the world reinsurance markets, A.M. Best observes that Canada was relatively immune to significant rate increases passed along by the reinsurance sector.
Consequently, with stable reinsurance costs and adequate rates, the rating agency says competition has increased and some companies may be more willing to use rate as a means to build market share and might be opportunistic either on select accounts or reentering niche markets.
A.M.Best says the 25 largest Canadian commercial property writers dominated the market in 2005 with a combined 84.9 share of direct premiums written, less than a 1% increase over 2004. Direct premium written was approximately CD$4.4 billion; net premium written wasCD$3.1 billion. The net loss ratio of this group totaled 70.7, sharply up from 44.2 in the previous year, according to A.M. Best.
Going forward, A.M. Best says it believes the Canadian commercial property sector will continue to experience competitive market conditions and further softening in rates, which will put added pressure on companies to maintain underwriting discipline during a softening market.
Although some companies on an individual basis will compete on price to improve market share, A.M. Best does not anticipate this to be an industry-wide practice.