Outlook stable for Canadian P&C industry, despite regulatory challenges

The Canadian property and casualty insurance industry is recording solid performance, despite several ongoing challenges, notes a new special report from A.M. Best.

The ratings agency has maintained a stable outlook for the industry. Last year was the fourth in a row where combined ratio improved and net premiums written increased, A.M. Best says. Net underwriting income last year totalled $1.5 billion, compared with $474 million in 2011.

The firm also says it believes “core performance will continue to benefit from profitability initiatives and the industry will maintain its strong risk adjusted capitalization.”

Still, some key challenges remain for the industry.

While 2010 reforms to the auto insurance regulatory environment and rate increases have offset rising claims costs to an extent, the province has also seen a deteriorating loss ratio in auto liability, the report notes.

The firm also says it’s concerned about recent legislation aimed at lowering rates in the province by an average of 15% (a goal the government recently announced should be reached within the next two years).

“Although there is no mandate for an across-the-board rate cut, A.M. Best remains concerned about implementation and whether this is the most efficient industry solution, particularly in light of ongoing issues such as: combatting fraud, defining catastrophic impairment and reducing the backlog of claims in mediation,” the report says.

The Financial Services Commission of Ontario recently announced that its backlog for mediation of auto insurance claims-related disputes had been cleared, but that has led to an increased number of applications for arbitration, the next step in the mandated dispute resolution process.

“Essentially, significant premium reductions without additional reforms under the current system may not be sustainable and may expose the P/C industry to significant capital risk,” A.M. Best says, echoing the concerns of the Insurance Bureau of Canada.

June’s severe flooding in southern Alberta also presents a concern for insurers’ 2013 results, the report notes. Insured losses from that event are estimated at between $1 billion and $3.75 billion, with a large portion of those losses in commercial lines from business interruption costs, the firm says.

Going forward, changing regulatory requirements, the “appropriate development and utilization” of telematics technology for auto insurance, and predictive modelling for risk management will be key issues for the Canadian P&C industry, the report suggests.

Overall, the industry has had strong and consistent levels of capitalization, proving its stability, A.M. Best says.