Insurers post dismal 2001 results as claims soar

Canadian property and casualty insurers ended the 2001 financial year with a meager 3% return on equity, with the final quarter industry results showing an even worse picture of a mere 0.5% return.

Speaking at the recently held annual Swiss Reinsurance Co. Canada’s “Statistical Breakfast” seminar, the Insurance Bureau of Canada’s (IBC) chief economist Paul Kovacs revealed the latest industry financial numbers. Despite the hardening of prices across all business lines, Kovacs describes the current financial environment facing insurers as being “challenging times”. “This is the lowest ROE [based on 2001 results] for the industry, this is simply the worst [year] ever,” he adds.

Although net premiums written and earned by the industry in the final quarter of 2001 show signs of strengthened pricing, the overall gains made in these areas for the full year were tempered compared with earlier industry expectations — with net premiums written rising 10.4% year-on-year, and net premiums earned up by 7.8%. The industry’s greatest weakness lies in runaway claims costs, Kovacs observes, with claims incurred in the fourth quarter climbing by 12.6% to $4.4 billion (4-Q 2000: $3.9 billion), while the claims expense for the full year rose by 11.7% to $16.2 billion (2000: $14.5 billion). This cost pressure boosted the industry’s combined ratio for 2001 to 110.3% compared with 108.4% from the previous year. The combined ratio for the fourth quarter of last year clocked in at 114.2% against the 112.8% shown for the same period a year prior. “For insurers, the priority needs to be material improvement in underwriting performance and profitability. The focus has to be on underwriting.”

Specifically, Kovacs says the underwriting losses suffered by the industry are pronounced in the personal lines business within Atlantic Canada and Ontario, as well as the auto markets in Alberta, and once again the troubled Ontario marketplace. “The combined ratio has been going the wrong way for the last four years, with challenging auto markets in Ontario and Alberta, and I don’t even know how to describe Atlantic Canada, the loss ratio [for this region] has been over 100% for years.” Much of the cost relating to auto is accident related injuries, particularly for soft tissue treatment. “We’re in a different business than 10 years ago with regard to the auto marketplace, which [claim-wise] used to be split 50/50 between car repair costs and injuries,” Kovacs notes.

As such, he points out that the IBC has been engaged in extensive negotiations with the provincial governments to bring about auto product reform. But, he adds, “governments have not yet given the industry authority to manage and control its healthcare expenses and medical claims. These costs have been rising by 14% a year for more than a decade.”

Notably, the decrease in industry underwriting profitability, combined with plummeting investment values, has seen a significant increase in the number of insurers failing the minimum asset test (MAT). The number of MAT failures over the past year rose from about five to nine companies, with nearly 60% of all insurers reporting to the IBC that they had incurred an unfavorable claims reserve development during 2001. Part of the drop in the industry’s earnings for 2001 came about due to the fact that companies had to shore up reserves to counter this unfavorable development position, Kovacs says.

Overall, insurers finished 2001 with an underwriting loss of $1.9 billion, showing a 26.8% year-on-year decline, while total investment income dropped by 13% to $2.86 billion. The drop on the investment side resulted mainly from a 43.4% decrease in investment gains which amounted to $581 million for the 2001 financial year against the $1 billion reported at the end of 2000. Notably, Kovacs points out, the industry’s combined ratio and interest rates have moved out of sync. Historically, the combined ratio has tracked the movement of interest rates and the consumer price index (CPI), with an increase in interest rates usually signaling a weakness in the price cycle as insurers are able to absorb losses through stronger investment earnings growth. This has not been the case for the last two years, Kovacs notes. “Investment performance is going to be a big issue for the industry…there’s not a lot of optimism on the investment income side going forward.”

As a result, the industry finished 2001 with a net profit of $581 million compared with the $1.2 billion made for the previous year. “The focus has to be on underwriting, and there’s going to be pricing adjustments, but this [building an industry recovery] is also going to involve a lot of components,” says Kovacs.