Canadian Underwriter

Weather hits insurance industry hard in 2013, signs of economic resurgence

March 27, 2014   by Angela Stelmakowich, Editor

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A turn in the weather last year proved enough to undermine the performance of the insurance industry, Gregor Robinson, senior vice president of policy and chief economist for the Insurance Bureau of Canada (IBC), said during Swiss Re’s 29th Annual Canada Outlook Breakfast in downtown Toronto Thursday.

“For 2013, results have been down significantly from 2012. How can we explain that? In one word: weather,” Robinson told a room full of senior insurance and reinsurance representatives.

Taking away reserve releases from prior years, he pointed out that 2013’s modest underwriting gain of $250 million becomes a loss of more than $900 million.

Overall, combined loss ratio rose to 99% from 95.4%, loss ratio was up to 68.3% from 64.9% (the result of claims growth of 8% and a 3.7% increase in premiums), return on investment fell to 3.2% from 4%, return on equity (ROE) fell to 6.6% from 10.7%, and comprehensive ROE fell to 6.2% from 10.2%.

“Despite a difficult year, MCT (minimum capital test) rose to 240.6% from 237.3%, demonstrating the continuing resiliency and capital strength of the Canadian property and casualty industry,” Robinson said.

That difficult year was led by severe weather. Canada saw $3.2 billion in insured losses from severe weather in 2013 – the lion’s share of which related to the severe flooding in southern Alberta (more than $1.7 billion) and flash flooding in and around Toronto (more than $900 million). 2013 was the costliest year for insured catastrophe losses since tracking began in 1983, Robinson said.

The record cat losses had a major impact on property lines, he noted, reporting that personal property claims grew by 31%, and the loss ratio went from 58% to 73%. For commercial property, claims grew by 31%, and the loss ratio went from 62% to 77%.

While in 2012, Canada saw astonishingly good weather, few natural catastrophe losses and generally low claims costs, that changed markedly in 2013. “It looks as though 2014 is picking up where 2013 left off,” Robinson told attendees, citing severe winter storms and record cold temperatures across the country.

However, there are several signs of economic resurgence – both globally and nationally – that are positive for the p&c industry, he pointed out. These include that U.S. fiscal and economic trends are improving, Europe is showing signs of emerging from recession, the growth in emerging economies continues, and that interest rates remain low.

Swiss Re Annual Canadian Insurance Outlook Breakfast, Toronto“For our industry, that’s both good and bad,” Robinson said of the last point. “On the one hand, it’s an ongoing drag on return on investment – we’ve seen that for some time now. On the other hand, low interest rates encourage consumer spending, fuelling premium growth across all lines,” he explained.

Robinson said Canada’s gross domestic product (GDP) grew by 2% in 2013, with growth for 2014 and 2015 expected to be 2.5%.

“Stronger GDP growth generally means stronger demand for p&c products. So next year, we expect to see momentum in premium volume and take-up rates across most lines. And on top of that, Canada’s inflation rate remains low at 1.1%, which helps contain claims costs,” he told attendees.

Although “easy monetary conditions and low inflation” are expected to continue well into 2015, Robinson noted that stronger growth inevitably means interest rates will rise. “This is a double-edged sword for our industry: it produces higher yields, but, of course, reduces the value of bonds held.”

He noted that a spike in medium and long-term Canada bond rates last spring reduced bond prices and spurred “an industry-wide loss in asset value of almost $800 million. This resulted in comprehensive return on investment falling from 3.9% in 2012 to 3% last year.”

The outlook, though, is that rates will rise gradually. “This is ideal for our industry, because it allows time to adjust portfolios to higher yields and lower bond prices – without a shock to investment performance.”

Despite the gradual and steady improvement in the financial performance of the insurance industry since the 2008-2009 crisis, 2013 provided a clear reminder of how quickly things can change, Robinson said. “What it tells us is that even with a positive economic outlook, it only takes a turn of the weather for our industry’s performance to be undermined.”