Why the hard market could be unsustainable

The Canadian industry’s combined ratio, at 81% so far in 2021, is at a historic low but this is mainly due to a 23% drop in claims and adjustment expenses, from $20.26 billion in the first six months of 2020, to $15.5 billion during the first six months of 2021, MSA Research said in a report released Monday.

“An industry combined ratio of 81.1 at six months is one for the history books,” Toronto-based MSA Research said in its quarterly outlook report for Q2-2021, referring to the industry-wide underwriting profit for the first six months of 2021.

“It is hard to imagine that the galloping claims trend we’ve seen over the past few years has suddenly come to a screeching halt. More likely that this is just a pause, in which case, things will revert to trend in 2022. If, however, claims continue to be tame, it will be difficult for the industry to keep the pedal to the metal in terms of rate. The hard market in Canada may not be sustainable.”

In its report, MSA included some key aggregate figures, on the Canadian property and casualty insurers, for the first six months of 2021.

Direct premiums written were up 11.62%, from $34.3 billion in the first half of 2020 to $38.29 billion during the same period this year.

The industry-wide combined ratio improved 20.79 points from 101.89% in the first six months of 2020 to 81.1% in the first six months of 2021.

The vast majority (93%) of insurers had combined ratios of less than 95% in the first six months of 2021, compared to 50% in 2020 and 22% in 2019, MSA said.

“If claims stayed flat, we’d be telling a less happy story,” the research firm said. “Barring a mega CAT, we can expect 2021 to be another very solid year for the industry allowing re/insurers to build their financial strength, capital buffers for more difficult times.”

The industry’s net loss ratio dropped 21.15 points, from 71.29% in the first half of 2020 to 50.15% in the first half of 2021.