Uneasy Optimism…

The financial results of Canadian and U.S. insurers for the first half of this year suggest that the two marketplaces are converging in a positive direction after several years of runaway claims costs. For both U.S. and Canadian companies, the second quarter of this year marked the first drop in the combined ratio to below 100% since the beginning of the last “soft market” that began in the late 1990s. While Canadian insurers have recorded growing underwriting profits since the beginning of this year, their U.S. cousins are unlikely to move into positive underwriting territory until next year, according to views expressed by the Insurance Information Institute (III) and the Insurance Services Office (ISO).

Despite this, the general view of analysts at the III, ISO and the National Association of Independent Insurers (NAII) regarding the latest U.S. industry returns borders on almost “ecstasy” in their forward outlooks. Indeed, U.S. insurers were able to generate a return on equity (ROE) of 9.8% for the first half of 2003, while Canadian companies posted a 5.8% ROE for the second quarter (despite having a better underwriting result), with the industry’s six months’ return clocking in moderately lower. With the U.S. industry mood being “bullish” based on the latest returns, the Canadian perspective could best be described as “lukewarm”.

Why is this so? The biggest difference between the two marketplaces is the much higher proportion of personal lines business that accounts for the total in Canada, with auto insurance being in the “driver’s seat”. This, ultimately, is the reason for caution expressed by insurers and brokers alike in their short to medium-term predictions of an industry profit recovery. In one word, the future viability of private insurance in Canada – specifically personal lines – amounts to “politics”.

Although Canadian underwriting results now appear to be moving on the right course (albeit in a sluggish manner), the real concern of insurers and brokers looking ahead is political interference with normal market forces applying to a very large portion of their books of business. What began as a “political spat” in Atlantic Canada election debates between the various political parties on the cost and availability of personal lines auto insurance has since escalated to become virtually a countrywide phenomenon. The “political factor” is now a “wild card” for auto insurers operating in nearly every provincial “free market”.

Notably, while the political debate surrounding pricing and benefits of the auto product continues to rage throughout the Atlantic provinces (with Nova Scotia being the current “hotbed” of discontent between insurers and government over the latter’s proposed 20% auto rate cut and premium freeze for the duration of 2004), the political war has expanded to engulf Ontario and Alberta. The recent provincial election outcome in Ontario – which saw the Liberal Party gain a majority government in ousting the ruling Progressive Conservative (PC) Party – has left insurers and brokers in the dark to what they can expect in terms of regulative controls on auto insurance. And, while a strong possibility exists that a number of the Atlantic provinces may move toward government-run auto insurance systems (despite going against the advice of a joint regional task force established by the governments to investigate the viability of doing so), the real unknown factor for global insurers is the Ontario market. With several of the international insurance companies having withdrawn from other countries such as Australia and the U.S. over recent years due to uneconomical operating conditions, the final direction taken by the new Ontario government concerning auto coverage could well spark a company exodus from the country.

Included in auto insurance product reform introduced by the previous Ontario PC government shortly before its demise from office was expense cutback initiatives, with the most alarming aspect of its “insurance affordability plan” being a $100 million reduction in insurer expenses which were not detailed in terms of how companies would achieve this goal. This, alone, could have brought about mass withdrawals/discontinuation of operations among insurers, mostly in the ranks of the smaller, marginal operators, which would leave brokers and consumers with greater coverage availability problems. Presumably this plan was scrapped with the passing of the old government.

However, for Ontario brokers and insurers, the election outcome could be “from the frying-pan into the fire” based on the vague auto insurance-related promises made by the new Liberal government to the public. The most prominent issue is the government’s promise of a 10% across-the-board reduction in auto rates with the prospect of a rate freeze blowing in the wind. In this respect, there is also no guarantee that the government will stand by the auto insurance product cost-cutting reforms introduced under Bill-198.

Clearly, insurers and brokers now face a formidable challenge in developing “government relations” in Ontario. The outcome could be portentous to the future participation of global private insurers in Canada. Hence, insurers in Canada hold an optimistic view of their future in the country based on the progress made toward auto product reform and the underwriting recovery underway, but they also express unease regarding the uncertainty of where the “political piper” may lead them.