Low investment yields means little margin for error on underwriting side: OSFI

Extremely low investment yields, the result of the financial crisis, means the Canadian property and casualty industry has very little margin for error on the underwriting side, Canada’s solvency regulator told delegates attending the National Insurance Conference of Canada (NICC) in Montreal.
“The investment yields are just so miniscule today that any misstep on the underwriting side is going to have implications much greater than what we saw years ago,” Bruce Thompson, director of the Office of the Superintendent of Financial Institutions (OSFI), said in the first NICC presentation on Sept. 20. “The consequences today are greater than they were four years ago.”
Years ago, insurers could use their investment yields to offset any losses on the underwriting side. But those days of higher investment yield are at an end.
Thompson noted investment yields for capital yields hovered around 4.1% for the six years leading up to the financial crisis in 2008-09. Now they currently sit at about 1.8%.
“One doesn’t have to be a rocket scientist to see what that implies,” Thompson said, adding it will therefore be much more difficult to use investment income as a means to bail out poor underwriting results.
Underwriting profitability is already “stressed,” Thompson observed. He noted the industry as a whole posted an underwriting profit of just 1% in the first half of 2010, despite optimistic statements that the global recession is turning for the better.
“That is a long, long way from underwriting gains that we saw a couple of years ago,” he said.