Canadian “cost of risk” rises 65 percent

The cost of risk in Canada rose by more than half this year to an average of $2.88 per $1,000 of revenue compared with 1999’s $1.74 per $1,000 revenue, according to the latest Risk & Insurance Management Society (RIMS) and Ernst & Young Benchmark survey of risk managers in the U.S. and Canada. In contrast to the increase in the Canadian cost of risk, U.S. risk managers benefited from a 9% reduction in their risk expenses, which saw the average rate fall to $5.20 per $1,000 against last year’s $5.71 per $1,000.

This year, property risks in Canada saw the biggest increase in cost, with the average rate more than doubling on last year’s level. The cost of liability risk rose by 42% year-on-year. The dramatic rise of property risk costs is attributed to corrective actions taken by insurers to weather losses such as the ice storm, the authors of the survey say. They also note that, despite the fact Canadian costs rose this year while the U.S. level declined, the cost of risk in Canada remains about 10% lower than the average cost south of the border.

The U.S. cost of risk amounts to about half a cent on the dollar, the authors observe, which is the lowest level the market has seen in a decade. The lower cost is said to be the result of reduced insurance premiums as well as lower retained losses. Specifically, large U.S. companies (with revenues exceeding $5 billion per annum) reported an 8% drop in the cost of risk this year while smaller businesses saw a 4% drop. Although the survey results reveal the price weakness of the commercial insurance market, risk managers should expect the cost of insurance to increase next year, the authors warn. “In spite of the good news about the reduced cost of risk, this trend may soon reverse. Over the past decade, the cost of risk has closely tracked the overall operating ratio for commercial insurers, suggesting that when they do well, they are inclined to reduce premiums. This year insurers’ results continue to worsen which could lead them to increase premiums in the future,” says James Gamble, a senior manager at Ernst & Young’s business risk solutions practice.