Small underwriting profit predicted for Canadian insurers

A Canadian insurance executive is projecting a small underwriting profit for the industry for 2012, while expressing concern about economic uncertainty, climate change and the condition of the nation’s roads and sewers.

Philip Cook, chairman and CEO of Omega Insurance Holdings Inc., is predicting the loss ratio for the Canadian insurance industry will be 66 to 67% for 2012 while the expense ratio will be “in the 30 to 30.5% range,” meaning the combined ratio will be 96 to 97.5%.

“I think we’re going to end up this year with a very small underwriting profit,” he said of the industry as a whole during the Annual Industry Trends Breakfast Thursday. “On the basis of those numbers it would be 2.5%.”

The event, organized by the Insurance Institute of Ontario, was attended by roughly 100 executives and held at the National Club in Toronto’s financial district. Cook has been the speaker for the last several years.

This year, Cook said he compiled his financial projections forecasts using insurance firms’ actual results for the first three quarters of 2012 and then extrapolating from their fourth quarter results from the previous five years, noting he is “assuming that history will repeat itself.” He was using both Canadian firms and Canadian branches of foreign firms.

Although the investment return this year was “not too bad, given the investment climate out there,” he noted that when you adjust returns to account for additional capital reserves, insurance firms would have a return of about 2.85%.

Economic uncertainty, he suggested, makes consumers reluctant to accept increases in personal insurance premiums.

“It’s very very difficult for us to get the type of rate increases that we need at a time when people can’t afford those increases,” he said, suggesting that the industry will not return to a “hardened market” this year.

Social media not just a fad

One recent phenomenon he discussed was the increased use of social networking web sites, alluding to services such as Facebook and Twitter.

“The use of social media for protest purposes and for the mobilization of protesters is alive and well,” he said. “We are seeing that all the time in other industries. We have to be really really careful how we manage our need to increase premiums on the personal lines end. We’ve got to communicate why we need it.”

He suggested that using the term “trend” is a misnomer because economic uncertainty and social media are not temporary or “fads.”

Other issues Cook discussed were climate change and infrastructure.

“Obviously we will continue to see more weather-related losses,” he said.  “It’s a fact of life. Whether all of the (tropical) storms make landfall and create problems, whether some of them create problems such as Sandy, is open to debate, but there’s no debate on the fact that the climate is changing.”

Toronto’s Gardiner Expressway a “catastrophe” 

This, he suggested, is related to the issue of infrastructure requiring repair or replacement. Cook noted many countries have failed to invest enough money in infrastructure.

One local example he cited was Toronto’s Gardiner Expressway, part of which is elevated. City staff estimate the highway will require more than $500 million worth of repairs over 10 years, including the replacement of several sections of the deck east of Strachan Avenue.

“I’m personally not driving anywhere near the Gardiner Expressway for quite a while,” Cook said. “It’s just a catastrophe.”

He added the general problem of infrastructure requiring repair “is emanating from this changing landscape of climate change,” with more rain, more flooding and more instances where a thaw follows freezing weather.

“It’s certainly in the insurance companies’ interest to see those infrastructure projects move ahead,” he said. “It’s certainly a loss prevention issue once you get to that level.”

He noted other countries, such as Argentina, are giving insurance firms tax breaks if they invest in infrastructure firms.