What the industry’s financial results show about the dreaded ‘COVID quarter’

Financial data marking the end of the “COVID quarter,” the dreaded 2020 Q2 results, show the Canadian P&C industry digging itself into a deeper underwriting hole than during the same point last year — with loss ratios in cyber and CGL policy lines dramatically on the rise.

Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), published the industry’s second quarter results recently. They show Canadian federally regulated insurers posted an $893-million underwriting loss in 2020 Q2, despite taking in $3.2 billion more in underwriting revenue this year than over the same period last year. During 2019 Q2, the industry posted an underwriting loss of $804.5 million.

Overall, the P&C industry turned a modest profit of$898.5 million during the quarter. Net written premium for the industry increased to $25.4 billion, an increase of 17.7% over the same period last year, but so too did the industry’s total claims expenses. Claims costs in 2020 Q2 ballooned to about $25 billion, a 15% increase over 2019 Q2.

And with interest rates near zero — a byproduct of the economic recession spawned by the virus-related business shutdowns — the P&C industry’s net investment income shrank from $1.9 billion in 2019 Q2 to $1.5 billion in 2020 Q2.

The auto insurance segment, including both private passenger and commercial auto, was one of the very few industry segments in which claims costs decreased. The second-quarter total loss ratio for the entire auto category dropped from 78.3% last year to 75.8% this year, most likely because many people parked their cars while under government lockdown orders during the pandemic. Nevertheless, the loss ratio in the auto personal accident category (i.e. accident benefits in personal auto lines) crept up to 100.5% in this year’s second quarter, an uptick from 93.8% over the same period last year.

In the liability category, many lines saw escalating loss ratios in 2020 Q2. In some instances, most notably in the cyber liability and Commercial General Liability (CGL) lines, the spikes in loss ratios were dramatic.

For example, the loss ratio in cyber liability shot up to 498.9% in 2020 Q2, when employees were working remotely from home to prevent the spread of the virus. That compares to just 153.7% during the same time last year. Insurers and commercial brokers have been reporting a marked increase in phishing and social engineering attacks: Cybercriminals are trying to take advantage of isolated employees working from home, they say, thereby testing the cyber security of businesses during the pandemic.

After a number of class actions have been filed against insurers (the industry generally excludes pandemic coverage from business interruption policies), it comes as no surprise that CGL liability loss ratios are up.

In the CGL liability line with products, the loss ratio was up to 95.8% from 65.9% over the same period last year. CGL policies sold without products became downright unprofitable in 2020 Q2, with the loss ratio exceeding 112%. That’s almost double what it was during the same time last year, when it was only 60.6%

There has been some discussion within the P&C industry about D&O rates climbing, particularly as directors and officers of publicly-traded companies come under scrutiny for how they handled the pandemic. Last year, in 2019 Q2, the loss ratio in the D&O liability line stood at about 50%. That ticked up to 59.3% during 2020 Q2.