Canadian Underwriter

How auto could be the force that eats into Canadian insurers’ results

April 8, 2022   by David Gambrill

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With ROE levels in the Canadian P&C industry at a historic high of 17%, count Lloyds Canada among the list of insurance providers that caution the industry not to squander the hard-won gains of the hard market in a bid to drop rates and gain market share.

Lloyds is promoting the need for insurers to maintain underwriting discipline. And not only for the inflationary reasons the industry is hearing this far—although Lloyd’s is keeping an eye on that, too. But also because auto insurance claims may quickly eat away at ROE once driving levels reach their pre-pandemic normal, warns Marc Lipman, president of Lloyds Canada, and attorney in fact, Canada.

“In Canada to date, if you look at the results for the past couple of years, Canadian domestic carriers’ proven income comes largely as a result of decrease in loss ratio from auto. There’s 15% decrease in their loss ratio just because of the [current] business [conditions].”

“In auto, it was because of the low frequency [of claims],” chimed Burkhard Keese, chief financial officer and chief operating officer of Lloyds of London, who was visiting Canada as part of a roadshow.

“And automobiles make up half of the premiums in Canada,” added Lipman. “But the day will come—and has started already—where people are going to start driving again. And they’re not inherently better drivers now than they were two years ago. So, the expense ratios [based on escalating auto claims costs] can go right back where it was, and return on equity is going to go right back down to where it was.”

Lipman was responding to a question from Canadian Underwriter about things that could threaten the hard-won gains from Canadian insurers during the hard market, leading to the Canadian P&C industry’s healthy balance sheet in 2021. He was speaking at Lloyd’s Non-deal Roadshow in Canada Thursday.

Inflation is another emerging threat to insurers’ balance sheets, something the Lloyd’s market is considering as well.

“We didn’t create inflation, but unfortunately, not to account for it in our pricing would be to give up all of the hard work that’s been done over the past two or three years,” Lipman said. “It’s absolutely essential that that pricing, terms and conditions take into account inflationary situations.

“In 2021, Lloyd’s market in Canada grew 22%. That’s a huge number, given the size and presence of Lloyds in Canada already. It finished the year at over CAD$5.3 billion in top gross written premium. Lloyds is continuing to look to grow smartly, at the right price, with the right terms and conditions, because otherwise the capacity won’t be for the long term and won’t be consistent. That’s what our clients and our broker partners need from models.”

Particularly anomalous is the combination of the high inflation rate with the low-yields of interest on investment income, Keese observed.

“When I arrived here [in North America] on Sunday, I turn on the TV and see 7.9% inflation. [Investment] yield isn’t 2%. The last time, when I was a young guy in the 1990s and in the 80s, we had 5% inflation and a 10% yield. I can understand that concept. But the concept of inflation and low interest rate, it’s for me really, really difficult to understand.”

Brokers in Canada have suggested that some markets are finally talking about growth opportunities in commercial lines. For Lloyds in Canada, opportunities for growth include cyber and directors and officers (D&O) insurance.

“I think cyber risk is on everyone’s radar, no one can get enough cover,” said Keese. “That is really something the industry needs to deal with. We found hopefully a mechanism via London Bridge where we can help large companies [with cyber]….but you have to be absolutely careful.”

One thing Keese noted is that ransomware is always featured in cybercrime.

“Without cryptocurrency, you don’t have cybercrime. Because in a ransomware attack, you can’t get ransom in cash, right?” Keese said. “In the end, all this cyber stuff is done via crypto currency. And that is what you have to understand: If you’re worried about cybercrime, you cannot facilitate cryptocurrencies.”


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