April 27, 2005 by Canadian Underwriter
Despite record profits reported by the Canadian property & casualty insurance industry last year, the industry’s position of profitability will be difficult to maintain, says Nicholas Smith, attorney in fact in Canada for Lloyd’s underwriters.
Smith made the remarks at this week’s CIP Society Symposium in Toronto, where he pointed out the that industry’s long-term return on equity remains a “distinctly unimpressive” 8.3%. The industry is “failing to make the returns on underwriting that produce returns on capital equal or greater to its cost of capital”, he says, which give capital providers “every incentive” to invest their money somewhere else.
Insurers need financial strength in order to deal with catastrophes when they do happen, as well as to deal with the claims of the past by dealing with under-reserving issues.
The industry’s only salvation can come from underwriting, in the absence of significant investment returns either in the bond or equity markets currently. “In order to produce the six cents of each premium dollar that is profit and provides a reward for the capital employed in the industry, and an incentive for more to come in, the industry has to make sure that it is only paying out 60 cents of each premium dollar in claims,” Smith explains.
In order to meet this underwriting challenge, insurers much understand the risks they are covering and how those risks are changing, and they must ensure they are taking on those risks under the right terms and conditions, he adds.