Industry through period of “tough structural changes”: Voll

Facing a new global economic reality, insurers are just coming out of a period of difficult adjustments which lead them to a healthier, more stable financial position, says Jane Voll, chief economist for the Insurance Bureau of Canada (IBC).
In her quarterly “Perspective” analysis of the market, Voll notes that since 2000 the industry has suffered its worst earnings drought since the liability crisis of the early 1980s. From 1998-2002, the industry’s earnings dropped well below their historical average of 10%, creating an earnings deficit of $4.6 billion.
In response, customers of both commercial and personal lines writers faced stiff price increases and changing policy terms. Voll notes that the industry would have needed to produce at least two years of 15%-plus returns, something unlikely to happen, particularly given overall slow economic conditions and persistently low interest rates.
The hard market conditions witnessed over the past few years are, to Voll’s thinking, sign of a structural change in the industry in response to a new worldwide economic reality single-digit inflation and single-digit interest rates. This is combined with ever-increasing cost of catastrophes.
The industry had to turn its focus to underwriting profitability, something it had not been able to consistently produce for the last 30 years. “We know in this generational low interest rate environment we’ve had to make a lot of changes,” Voll notes in interview. Specifically the industry had to “close the gap” between interest rates and the combined ratio the marker of underwriting profitability. “We’ve arrived at a point in underwriting strength where we should enjoy a period of stability. The risk of insolvency is lower than before.” And, there is more cushion to absorb claims. “The signs are that we’ve turn a healthy corner after years of distress.”
As Voll notes in “Perspective”, despite better returns, many investors remain wary of stock insurers, given the rate softening already being witnessed. While competitive forces and other factors may cause fluctuations in price, however, Voll says the structural changes made since the new millennium began should provide for greater stability moving forward. “We’ve made an enduring change.”