Insurers suffer worst investment blow for 2002

With the Canadian property and casualty insurance industry bringing in return on equity (ROE) of 1.6% for 2002, last year takes the title as worst year on record – despite price increases that saw an improvement in underwriting performance.

Financial data collected by the Insurance Bureau of Canada (IBC), recently revealed by the bureau’s chief economist Paul Kovacs at the annual “Statistical Breakfast” hosted by Swiss Re, shows that a combination of poor investment performance and ongoing deterioration in primarily the Ontario auto market were responsible for the industry’s declining fortunes. The latest ROE is almost half the 3.1% return disclosed for 2001 (which had been labeled as the worst year on record). From a bottom-line perspective, the industry produced a net profit of $312 million for 2002 compared with the $600 million reported for 2001. “Higher prices over the past 12 months were not enough to make up for mounting claims costs and a significant slump in investment income,” says Kovacs.

The industry’s realized investment gains slumped by 77.7%, to $137 million last year against the $615 million from the year prior. Kovacs notes that in 2002, interest rates remained at 20-year lows while the TSX-index was down by over 10%. The lower return on interest-based investments, combined with the decline in realized gains, saw the industry’s total investment performance for 2002 drop by 20% year-on-year to $2.3 billion (2001: $2.9 billion).

On a brighter note, the industry managed to improve its underwriting result last year, with the combined ratio clocking in at 105.8% against the 110.4% shown for 2001.

Driven mainly by price increases, direct written premiums for 2002 rose by 23% year-on-year to $29.8 billion while earned premiums climbed at a more sedate 21.2% to around $25 billion versus the $21 billion reported for 2001. Kovacs notes that premiums have experienced rapid growth in the last couple of years, “the strongest we’re seen for a very long period of time”.

However, claims grew at a startling 16.7% during 2002, despite a drop in the loss ratio to 76.5% compared with 2001’s ratio of 79.5%. “The issue is auto, auto, auto” driving costs, Kovacs notes. He points out, Ontario auto is “going the wrong way”, producing a loss ratio of 96.4%. As a result, almost two-thirds of a billion dollars in auto loss development has “shocked and absolutely overwhelmed” insurers, which has troubled their ability to reserve properly, he adds. Insurers posted a net loss of $114 million for the fourth quarter of 2002 against profit of $51 million the year before. The combined ratio improved to 106% from 115.5%, with the loss ratio dropping to 76.5% from 85.2%.