Industry’s ROE slips again on rising claims (August 27, 2001)

Canada’s property and casualty insurers came home with a meager 2.6% return on equity (ROE) for the 12-month period to end June this year. The latest quarterly financial figures released by the Insurance Bureau of Canada (IBC) show a 70% drop in the industry’s taxed earnings to $269 million for the first half of this year compared with the $908 million posted for the first six months of 2000. Second quarter net earnings fell by 44.3% to $261 million against the $469 million reported at the end of the 2000 second-quarter.
The IBC’s chief economist Paul Kovacs notes that the latest quarterly ROE ranks the lowest rate since 1975.
Although premium growth for the six months clocked in at a healthy 8.6%. (the biggest average increase since 1995), which also saw Ontario auto premiums climb by 15.2%, once again the industry’s inability to contain claims costs saw any pricing gain eliminated. Claims costs on average rose by 10.7% for the latest reporting period, with Ontario auto producing a startling 25.5% gain year-on-year. "The most significant increase was in insurers’ accident benefits and bodily injury costs associated with injuries suffered in motor vehicle wrecks."
The rise in claims had boosted the industry’s loss ratio by 1.4 percentage points to 72.8% by the end of June. This, however, shows modest seasonal improvement for the second quarter, as the loss ratio came in 8.2 percentage points lower than the first three months of the year. Typically, the seasonal improvement is in the order of 6%, says Kovacs. Overall, the combined ratio for the first six months of this year was 108.8% compared with the 105% reported for the same period a year prior. This produced an underwriting loss of $870 million for the first half of this year.
Weak investment gains, combined with falling interest rates compounded the woes of insurers, with total investment income clocking in 64.5% lower at $199 million against the $560 million disclosed at the 2000 halfyear mark. From an overall perspective, Kovacs says the huge jump in claims costs, specifically Ontario auto, had not been anticipated by the industry. While the IBC is lobbying for product reform and other measures in an attempt to balance out the need for steep rate increases almost nationwide, Kovacs says such developments will take time to feed through to the market. "More than half the year is already in the bag, this year’s [financial returns] can only be bad. You [insurers] can’t pull out of this, there’s no time."