Will the oil shock slow auto insurers’ post-pandemic loss ratios?

Insurers have been sounding the alarm about their auto claims ratios returning to normal post-pandemic, but expect the oil shock to temper that expectation somewhat, P&C industry execs predict.

The war in Ukraine and consequent embargo on Russian oil have helped drive the price of West Texas Intermediate (WTI) crude oil up from US$57.68 per barrel in 2020 to an average $108.50 in March 2022, based on stats provided by the Alberta government.

At the gas pump, that translates into a national average retail price for gas in Canada of 208.5 cents per litre as of last Thursday, per CBC, citing GasBuddy statistics. That’s 76 cents higher than last year’s average of 132.2 cents per litre, CBC reported. The country hit an all-time record of 210.8 cents per litre on June 12, according to GasBuddy.

Which raises the question, will people really be driving as much as insurers thought, post-pandemic? Perhaps not, some P&C industry execs told Canadian Underwriter last week in a webinar, Global Economy: Impact on Canadian P&C Industry. However, the industry will still see higher loss ratios in auto insurance than they did during the pandemic years.

“There’s no doubt that higher oil prices lead to fewer car accidents, as people just don’t as often jump in the car and go driving,” agreed Alister Campbell, president and CEO of the Property and Casualty Insurance Compensation Corporation (PACICC). But “if there’s a slightly less [driving] because of the oil price, I suspect the bias would likely still be that we will see a return to more driving over the next 12-to-24 months than we’ve seen during lockdown.”

Sonia Kundi, chief risk officer at Zurich Canada, agreed. “Obviously during the pandemic we saw a lot fewer drivers on the road. At one time, I could actually drive up Yonge Street [Toronto’s busiest street] and not be in a traffic jam, or even cross over the road [as a pedestrian] without having to wait for 10 minutes, which is fantastic. But I do think oil prices…will have an impact.

“People won’t be driving as much as prior to the pandemic, maybe. But I think people are just eager to get back to some sort of normality now.”

During the early part of 2020, just before the pandemic, Canada’s auto insurers had a collective combined ratio in auto of more than 100%, a signal that writing auto insurance was unprofitable, Intact Financial Corporation CEO Charles Brinadmour observed in a fireside chat in April 2021.

But with government shutdowns of most businesses in 2020 to prevent the spread of COVID-19, the streets of Canada were comparatively quiet. Auto insurers saw their claims ratios drop from 78.1% in 2019 down to 71.8% by the end of 2020.

“All auto lines are exposed to loss frequency owing to distracted driving and the number of miles driven, but frequency was down significantly in 2020, as shelter-in-place requirements, business closures, and remote working arrangements led to a steep decline in miles driven,” A.M. Best said in a 2021 report on the Canadian insurance market.

With businesses re-opened, insurers expect to see increased driving and increased frequency of auto insurance claims, raising loss ratios again. But how much of a dent the oil shock may make in consumers’ driving habits remains an open question.

Feature image courtesy of iStock.com/GeorgePeters