Why Canada’s P&C industry is ready to absorb hit of pandemic-induced recession

Already under financial strain due to tightening markets in several lines of business, Canada’s property and casualty insurance industry nevertheless seems well-positioned to withstand a global recession triggered by the novel coronavirus pandemic — at least in the short term.

The global coronavirus pandemic has thus far sickened 179,111 and killed 7,426 globally, according to Mar. 17 number from the World Health Organization. The pandemic appears likely to trigger a global recession, P&C industry analysts say, as governments adopt aggressive measures — including closing down borders and restricting domestic businesses activities — to slow the spread of COVID-19.

“We expect a global recession this year and no ‘V’-shaped recovery given the global coronavirus outbreak, tightening financial conditions, and the weak economic resilience to start with,” Swiss Re stated in a recent report. Swiss Re’s report relates specifically to events in Europe, the United States, and Japan. But the Canadian economy and P&C industry would not be immune.

“A recession is quite likely,” Joel Baker, president and CEO of MSA Research, told Canadian Underwriter, when asked about the financial impact of COVID-19 on Canada’s already-strained P&C industry. “The financial meltdown will hurt insurer’s balance sheets, though the drop of interest rates will temporarily buoy them.

“Ever lower rates strain insurers in the medium to long term — as they have done for more than 10 years — as investment returns dwindle,” Baker further explained. “The collapse of the stock markets will put stress on some insurers. The social distancing and work-from-home phenomena will contribute to much lower auto losses, while business interruption, travel insurance, event cancellation and credit insurance-type policies will take massive hits. A slowdown in economic activity will hurt commercial writers.”

Grant Kelly is the chief economist and vice president of financial analysis and regulatory affairs at Property and Casualty Insurance Compensation Corporation (PACICC), which protects policyholders in the event that an insurance company becomes insolvent. He noted that Canada’s P&C businesses will take a financial hit, just like all other businesses in the country’s economy, should a recession hit. “Having said that, we don’t always move in the same way at the same time,” Kelly said, comparing the P&C industry with other industry segments.

“In the short term, a couple of things going on will delay the impact [of a recession on P&C insurers] compared to the effect on the rest of the economy.”

Social distancing, for example, has reduced claims costs for China’s insurers, Kelly observed. The COVID-19 pandemic reportedly originated in China, where there are 81,102 confirmed cases of COVID-19, according to the Coronavirus Resource Center at John Hopkins University & Medicine. China’s government took aggressive measures to prevent the spread of the virus, and the number of confirmed cases in China has taken a downward direction, while the epicenter of the pandemic now has moved to Europe, according to WHO.

“The only place where insurers have reported [financial results] after the virus is China,” Kelly said. “And the Chinese insurance industry has lower [claims] frequencies, significantly lower frequencies, because they locked everything down.”

Kelly noted that social distancing in Canada means fewer people are driving, which means fewer auto claims. Coupled with P&C insurers having already increased auto rates [still yet to be earned through, in some cases], the returns should be better in the distressed auto insurance market. Property theft claims will also likely be down, he suggested, as fewer break-ins correlate with more people staying at home.

“The wildcard will be commercial,” Kelly said.

Kelly referenced a statement posted Tuesday by the Association of British Insurers (ABI), which essentially notes that most commercial business policies do not provide coverage for losses arising from a pandemic.

“Standard business interruption cover – the type the majority of businesses purchase – does not include forced closure by authorities, as it is intended to respond to physical damage at the property [that] results in the business being unable to trade,” the ABI statement reads. “A small minority of typically larger firms might have purchased an extension to their cover for closure due to any infectious disease.” Whether the extension will apply depends on the specific policy wording, as ABI notes.

For Kelly, those bigger commercial insurance programs that do include pandemic coverage could mean large exposures for insurers that offer those programs. Other obvious exposures would be event cancellation and travel insurance.

Event cancellation could take a multi-billion-dollar hit, for example, if the 2020 Olympics should be cancelled due to the spread of the coronavirus in the host country of Japan.