Weathering the storm

There are few leaders in the Canadian property and casualty insurance industry applying an optimistic view of business and earnings growth in 1999.

In fact, premium growth across the lines is unlikely to exceed the country’s expansion of gross domestic product (GDP) for the year with the industry’s average combined ratio rising to neutralize any modest gains made. This will translate into declining earnings which some analysts predict the sector’s net performance for 1999 could fall by as much as 35% compared with that of 1998.

CEOs at the recently held U.S. Joint Industry Forum conference expressed similarly dismal predictions for the p&c market south of our border. They cited conditions of increasing competition, rising technology costs, deteriorating underwriting results and little hope of an across-the-board hardening of rates as the main factors to drive the market in 1999.

Readers might say, “well what’s new, the same conditions applied in 1998”. The analysts point out, however, that several factors are likely to aggravate the situation in the year ahead: during 1998 insurers enjoyed the benefits of a bullish investment market in the first half of the year and were able to cash in on capital gains while the Ontario auto product, which accounts for a significant portion of the Canadian personal lines premium pool, delivered favorable results for 1997 and much of 1998. By the end of the third quarter of 1998 several company presidents had issued warnings of pending losses arising from Ontario auto due to excessive rate slashing while the potential for compensating the underwriting account through investment gains is narrowing. A significant hardening of rates to boost underwriting performance now appears to be the only short-term solution to the industry’s ailment.

The analysts, however, are less than confident the industry will be able to apply a tougher approach to underwriting in the year ahead due the ongoing battle for marketshare and the growing presence of electronic direct writing in personal lines. While the pricing war may have “bottomed out” by the end 1998, at least according to the more optimistic commentators, any significant rate corrections are unlikely to be applied by companies or accepted by consumers in what is still very much a buyer’s market. At best, insurers will have to weather out the current soft phase of the market cycle and continue to focus on cost-savings and maximizing on niche marketing opportunities.

Ted Belton believes that the industry’s lack of response to a rate correction in the second half of 1998 will ultimately translate into substantial losses on this year’s underwriting account. Even a market rate correction at this stage will do little to boost 1999’s earnings performance, he says. Overall, he expects company net earnings will be cut by about a third from 1998’s levels.

Don Smith notes that Ontario’s auto product accounts for roughly 40% of total premium income. Rising losses in this market will have a significant impact on company results. From a commercial market perspective, Smith sees the latest reinsurance treaty agreements as a bad omen: over 50% of renewals are now multi-year agreements which will enable primary companies to continue playing the rate cutting game. “My gut instinct tells me there won’t be any tightening of rates over the next 24-months.”

Overall, Smith expects companies will bear up to the strain of the soft market with most entering the new year fray with healthy balance sheets. “There are, however, some companies that could come close to the wire if the current market conditions continue through to the end of the year.”

The year past was not a particularly strong period for the p&c industry, Paul Kovacs agrees, with company results bruised by cat losses mostly arising from the January 1998 ice storm. However, excluding the ice storm figures from the equation, 1998 was still not a good year with a rising combined ratio and declining earnings trend, he notes. Similar conditions are likely to prevail in 1999 with the industry exposed to two weak fronts: under-performing investments as well as underwriting. “My sense is that the market will not turn in 1999, there are too many people out there chasing the consumer’s premium dollar. Overall, 1999’s results will likely be somewhere between 1998’s figures excluding the ice storm and that including the ice storm.”

Significant cat loss incidences could further unbalance the financial picture for this year, Kovacs warns, although he does not anticipate any severe events on the horizon. That said, the industry began the year with a $50 million tab from the January snowstorm which buried Ontario under a 115cm accumulation.

While 1999 is probably not going to go down in the history books as a particularly good year for insurers, the silver-lining to these stormy clouds is that the industry is well capitalized to absorb the underwriting strain. Another year of price-based competition could have a positive outcome in that some companies may be forced to consider partnerships or outright retraction from the market, resulting in fewer players chasing the same premium dollar. A reduction in the number of competitors could be the turning point to a healthier underwriting environment.