Canadian Underwriter

Price increases not enough to salvage 2002 insurer results

March 11, 2003   by Canadian Underwriter

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Insurers reflected on 2001 as “the worst year ever” and had hopes of a turnaround in 2002, but it was not to be. With the Canadian p&c industry bringing in return on equity (ROE) of 1.6%, 2002 now takes the title as worst year on record, despite price increases and improved underwriting results.
Based on regulatory filings representing about 90% of the industry, the Insurance Bureau of Canada (IBC) preliminary figures show that investment market woes and a continuing auto claims malaise are hitting the industry hard. The 2002 yearend statistics were released today at the 18th annual Swiss Re Statistical Breakfast in Toronto.
The 1.6% ROE is off even 2001’s dismal 3.1%. The industry brought in overall profit of $312 million, versus the $600 million it brought in for 2001.
“Higher prices over the past 12 months were not enough to make up for mounting claims costs and a significant slump in investment income,” says Paul Kovacs, chief economist for the IBC.
Realized gains from investments were down a dramatic 77.7%, to $137 million last year against $615 million the year prior. Kovacs notes that in 2002, interest rates remained at 20-year lows and the TSX Index fell by over 10%. Even insurers’ conservative investing strategies, mostly geared to bonds, failed to pay off as bond portfolios yielded a return of 6.4% versus the average 7.2% seen between 1997 and 2001. If bond yields had maintained average pace, the industry’s pre-tax profits on $27 billion in bonds would have been approximately $250 million higher last year.
The threat of war, corporate failures and accounting scandals have rocked the equity markets, with the industry’s common stock portfolio producing a loss of 2.1% last year compared to an average 15.9% return between 1997 and 2001. Average returns last year would have seen the industry bring in pre-tax income of $750 million above current estimates.
On a bright note, the industry did see underwriting improvement in 2002, with a combined ratio of 105.8%, versus 110.4% in 2001. Direct written premiums showed the effect of price hardening, up to $29.8 billion from the $24.2 billion reported in 2001. Earned premiums were up by 21.2% to just over $25 billion last year from about $21 billion in 2001. Kovacs notes that premiums have experienced rapid growth in the last couple of years.
However, claims growth was a startling 16.7%, despite a drop in the loss ratio to 76.5% last year versus 79.5% in 2001. Auto insurance remains the issue driving these costs, Kovacs notes, with Ontario auto producing a loss ratio of 96.4%. The Atlantic loss ratio sat at 92.9%, although this remains an improvement on the 102.1% posted for 2001. Quebec remains the only winner in the auto market, posting a loss ratio of 61.6%. These numbers compare with personal property, where the loss ratio was a satisfactory 64.9%, and commercial property at 61.5%, both improving on 2001 figures.
Comparing fourth quarter results year-on-year, insurers posted a net loss of $114 million in 2002 against profit of $51 million in 2001. The combined ratio improved to 106% from 115.5% and the loss ratio dropped to 76.5% from 85.2%. However, the industry posted an investment loss of $14 million in fourth quarter 2002 versus realized gains of $266 million a year previous.
“The p&c insurance industry has been left vulnerable after five consecutive years of poor results,” Kovacs says. The cure for the industry’s ills is renewed growth in investment income, but more significantly provincial legislative reform to control escalating auto insurance claims costs in Ontario, Alberta and the Atlantic provinces. “There will be some improvement in 2003, but considerable challenges remain for both insurers and their customers.”

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