Why Canadian P&C insurers in a good spot to tackle ongoing challenges

Canadian property and casualty insurance companies are in a good financial position going forward as challenges — both new and continuing ones — mount, according to A.M. Best’s latest outlook.

Over the last 10 years, the vast majority of Canadian P&C insurers have been rated at superior or excellent levels, with distribution over that time being “very consistent with even some improvement noted during this 10-year run,” explained Ray Thomson, director at the rating agency.

He noted that A.M. Best takes a conservative approach to rating assessments “and the hurdles for upgrades get higher as the rating level increases,” meaning that the bar only gets higher as companies try to reach new heights.

“However, the Canadian property and casualty market — with most of the ratings at superior or excellent — has thus far shown to be well-positioned to face ongoing and new challenges,” Thomson said during the A.M. Best Canadian Outlook: In the Shadow of COVID-19. It was presented virtually this year; the in-person event is usually held in Toronto.

And there is no shortage when it comes to challenges. For example, the ongoing COVID-19 pandemic will continue to present challenges to top and bottom lines, auto challenges will stick around in both Ontario and Alberta, and pressure will come from investments as emphasis will be placed on the need to attain underwriting profit.

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“More headwinds can be expected to continue in auto lines and weather losses,” Thomson added. “Competition remains strong with the largest players holding ground on market share. Catastrophe losses have spiked up again thus far in 2020, specifically with hail [and] flood events.”

However, despite these challenges, there are tailwinds he finds encouraging. Balance sheets among insurers are strong as companies have generally seen profitable operating performance. “Underwriting and distribution methods continue to develop in an effort to enhance the customer experience,” he noted. “Current reserving, conservative investment holdings and solid reinsurance programs all help to enhance balance sheets and risk-adjusted capitalization.”

Thomson pointed out that A.M. Best conducted a worldwide stress test in April to see if there would be any expectation of a negative impact on the balance sheet of insurers as a result of COVID-19. “These stress tests considered a negative impact on the investment portfolio as well as reductions in premium volume and income,” he explained.

No negative rating actions were taken on any Canadian P&C insurance company as a result of the tests, Thomson reported.

So, for now, the rating agency is keeping the market outlook as stable. “In addition to the strength of the balance sheets, it is important to note the additional impact of enterprise risk management in the quality of these programs we see in the Canadian property and casualty industry, particularly in response to the rapid change in the working environment,” he added.

Thomson highlighted the response of the P&C industry to the challenges of the pandemic. “Given the unprecedented pandemic at hand without an end in sight, challenges will continue. But the response has been solid thus far,” he said. “This is further testament to the strengths of the balance sheet as well as another feather in the cap to the response of each insurers’ enterprise risk management program.

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