Canadian insurance earnings plummet

January ice storm losses, rate cutting and poor investment returns are the major culprits pointing to a 42% drop in property and casualty insurers’ earnings to $1.137 billion for 1998 compared with 1997’s earnings of $1.960 billion, says Paul Kovacs, chief economist of the Insurance Bureau of Canada (IBC) at the recently held Annual Swiss Re Breakfast. As a result, the industry’s return on equity for the year is unlikely to be more than 7.1%, nearly half the 13.1% return made in 1997.

Based on the preliminary yearend data produced by Statistics Canada, the Canadian p&c market will likely have ended 1998 with underwriting losses 2.8 times greater than that of 1997. The total underwriting loss for the year should clock in at $1.318 billion with the industry’s total investment earnings amounting to about $2.799 billion, the latter showing a 16% decline on the previous year’s performance. The yearend data suggests that the industry’s combined ratio has risen to 107.6% compared with 1997’s 103.1%. Even when slicing out the losses incurred from the ice storm, most markets showed severe signs of profit weakness in 1998, Kovacs observes. “Catastrophe losses were obviously the highlight of 1998’s numbers, about 8% of the industry’s premiums went out the door to pay for the ice storm.”

Kovacs notes that the industry experienced its third sluggish year in premium growth, with 1998’s earned premiums not likely to be up by more than 1% while claims are probably going to be 5.2% higher in contrast. Quebec was the hardest hit market, he says, with the personal property loss ratio most likely 15.6 percentage points higher at around 96.7% and the commercial loss ratio clocking in at 92.3% compared with the previous year’s 66.1%.

On a slightly brighter note, Kovacs points out that, overall, the auto market underwriting position is showing signs of improvement, with the year’s loss ratio dropping from 75.8% to 74.7%. Liability risks also look better at a loss ratio of about 64.9% compared with the previous year’s 72.5%. But, with intense competition across the personal and commercial lines in nearly every province, the industry is definitely at a very weak point of the pricing cycle, he adds. A typical example of the deteriorating conditions caused by heated competition is the 10% decline of Ontario’s auto rates over the past two years.

And, with lower returns on investment, in the order of 7.9% for 1998 compared with 9.7% for 1997, the industry faces a tough road ahead. The industry’s capital gain earnings for 1998 will likely be half that of 1997 at $655 million, accounting for roughly 23.4% of total investment earnings. Further declines in capital gains are predicted for the year ahead.

However, the Canadian p&c insurance industry remains strongly capitalized, Kovacs notes. The underwriting performance ratios indicate that the industry is currently at its financially strongest position in the last 20 years. As such, from a financial health position, the industry is well protected to weather out the weak cycle in the year ahead. Kovacs says the industry could see firmer markets within the next 12 to 18 months, “1999 is unlikely to produce much improvement on the underwriting side”.