COVID’s impact on the Canadian P&C industry’s capital base

COVID-19 may have affected the earnings of individual P&C insurers unevenly, but the industry’s overall capital base reached the unparalleled height of $52.6 billion during the first three quarters of 2020, according to the Property and Casualty Insurance Compensation Corporation (PACICC).

“This is the most capital that insurers have ever held in Canada,” PACICC board chair Glenn Gibson noted in his remarks published in the PACICC 2020 Annual Report. “Strong, resilient capital is the foundation of the insurance industry and this firm base should allow insurers to play a strong role in assisting Canada’s rebound from the COVID-19 pandemic in 2021.”

PACICC is a compensation fund that pays out insurance claims to consumers in the unlikely even that an insurance company declares bankruptcy. Regulators have closed 32 property and casualty insurance companies since 1979, with some of the most recent being the Markham General Insurance Company in 2002 and the Home Insurance Company in 2003, as Matt Hands observes in a blog for Ratehub.ca.

The first three quarters of 2020 presented many ways to dent an insurer’s earnings, as PACICC’s report notes. Among them, there was a first-quarter oil shock, investment markets fluctuated wildly through the year, insurers paid out COVID-19 claim payments, and auto premiums to consumers totalled approximately $600 million, based on an estimate from the Insurance Bureau of Canada as of April 2020.

And yet, the industry’s Minimum Capital Test (MCT) score for the first nine months of 2020 was 234.2%, meaning that insurers held $2.34 in assets for every dollar of liabilities on their balance sheets. “This score is only marginally different than the 236.9% MCT posted at the end of 2019,” PACICC notes in its report.

So the short story for PACICC is that COVID has not introduced any solvency concerns for the P&C industry, broadly speaking. Which is not to say that individual P&C insurers haven’t been affected by the pandemic.

Seventy-five out of Canada’s 195 P&C insurers (38.5%) that publicly disclose their financial results have reported profits every year since 2015. But even the strongest of these financial performers were affected by the pandemic. “Nineteen of the 75 insurers that posted profits in each of the past five years reported losses through the first six months of 2020,” as PACICC observes.

As for those companies that weren’t generating solid underwriting profits before 2020, the pandemic and low interest rates spawned by the economic collapse tied to COVID didn’t do struggling companies any favours.

“Companies that post consistent losses over the medium term tend to require either additional capital from investors or additional monitoring from Canada’s solvency regulators,” PACICC’s annual report states. “Four P&C insurers reported negative net income in four of the past five years. Another six Canadian P&C insurers have reported losses in each of the past five years, and three of these insurers are now in the process of exiting the Canadian P&C marketplace.

“Consistent profitability is certainly not easy to achieve, especially in a time of global pandemic. It remains a very strong indicator of the future prospects for an insurer and an important metric in monitoring insurer and industry health.”

Feature image courtesy of iStock.ca/brightstars