Will Canada’s 2023 underwriting results track U.S. improvements?

Canadian insurers, like their U.S. counterparts, may see some better underwriting results this year.

In the U.S., property and casualty (P&C) insurance industry underwriting results are likely to improve during 2023, in response to significant premium increases in underperforming automobile and property segments, said a recent Fitch Ratings report.

The downside below the 49th parallel? Claims volatility in the face of higher inflation and general economic uncertainty could impede a return to underwriting profitability. During 2022, declining underwriting performance in personal lines drove a 31% drop in statutory earnings for U.S. P&C insurers, Fitch’s report notes.

“The personal lines sector should improve in 2023, as recent pricing and underwriting adjustments take hold amid normalizing insured catastrophe losses,” the ratings agency said.

In Canada, results provided by OSFI “show similar 2022 changes in results, e.g., very strong premium growth and lower loss ratios,” James Auden, managing director of North American insurance at Fitch, told Canadian Underwriter in an email.

Further, a recent MSA Research report said the Canadian P&C industry’s combined ratio of 85.4% and strong underwriting results at the end of 2022 hit up against rising interest rates and equity market volatility, which impacted investments.

“Examining year-end 2022 industry results reveals that the market more or less held its own and returned solid underwriting results with a combined ratio of 85.4. This is in large thanks to a historically large reserve release of over $7 billion,” wrote Joel Baker, president and CEO at MSA Research, in the MSA Quarterly Outlook Report Q4 2022. 

“Without that reserve release, the run rate COR [combined operating ratio] would have been closer to 96.”

2023 outlook
While U.S. results will improve, Fitch said underwriting profits may not return in 2023 – the agency forecast a 100.4% industry combined ratio for the full year.

“Above-average catastrophe-related losses and sharp deterioration in auto segment results drove the industry combined ratio three percentage points higher in 2022 to 102.5%, significantly above the 99%-100% range for the previous four years,” the report said. “Commercial lines combined ratios in aggregate are anticipated to slightly deteriorate from current favorable underwriting profit levels.”

Further, Fitch called for direct written premiums (DPW) growth to moderate somewhat in 2023 but hold above historical norms, thanks to momentum in personal lines.

“Direct written premiums expanded by over 9% for the second straight year in 2022, tied to commercial and personal lines rate increases,” Fitch said.

In Canada, MSA Research figures showed the industry’s 2022 combined ratio is up 1.25% from the prior year. And DPW surpassed $85 billion.

But, of concern, DPW (an increase of 7.41% from the prior year) is only narrowly keeping pace with inflation. “Net premiums written are slipping behind with a tepid 1.5% growth. The industry is flooring the accelerator, but the car isn’t speeding up,” Baker wrote.

For personal lines, this could indicate a softening cycle, although that’s not the case for commercial lines and reinsurance, he suggested.

And, commercial pricing stayed ahead of inflation, MSA Research observed.

DPW in 2022 was up by 12%, while net premiums written were up by 10.5%, and net premiums earned were up by 10.2%. A 2% increase in claims was offset by rising acquisition and general expenses.

Personal (and multi-line) writers, on the other hand, are broaching on soft market territory. DPW increased by almost 7% in 2022 and matched the inflation rate — but underwriting income dropped by nearly 32% from the previous year.  

Fitch, meanwhile, found potential claims volatility in the U.S. could impact reserves. “Variability in natural catastrophe losses remain concerning, compounded by sharp increases in reinsurance costs and less reliable available capacity,” said Fitch.

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