Hard Times

The first quarter 2002 financial returns for both Canadian and U.S. insurers would suggest that the “soft times” are over. Indications from the reinsurance sector also suggest that the beginning of a profit recovery is underway, with the improvement at the primary and reinsurer levels being driven by significant price increases. However, despite the broad improvement in the numbers, the North American insurance industry is far from being “out of the woods” and still faces a tough challenge in curbing the ongoing rise in underwriting costs.

Speaking at the recently held 2002 Canadian Insurance Congress (see article in this issue of CU for details), the Insurance Bureau of Canada’s chief economist Paul Kovacs points out that Canadian insurers are still likely to end this year with a paltry return on equity. In fact, he expects 2002 to be “the second worst year on record” following the dismal returns of last year.

Kovacs is also not upbeat for the bottom-line returns for 2003, suggesting that companies are unlikely to achieve the magical “10% ROE” that parent owners are looking for as a minimum “reasonable return”. Much of the underwriting problem rests with the auto markets (with Ontario auto comprising 50% of all premiums in Canada) and the desperate need for product reform. Until the provincial legislatures can be convinced of the need for reform (including to the rate filing process), insurers fear that premiums will not keep pace with claim costs – so there is clearly a long and hard battle ahead before peace is likely to rule through the kingdom of insurance industry.

However, not all the news is bad. The most encouraging development over the past quarter is the gains made in both written and earned premiums. Specifically, the fact that the growth rates at both levels, in Canada and the U.S., exceed the rise in overall claims costs. Kovacs notes that this is the first time in five years since the Canadian industry has managed to pull off this “hat trick”.

A comparison of the Canadian and U.S. first quarter results reveals several similarities that all bode well for the future. Canadian insurers increased net income by 25% year-on-year with net earned premiums up by 7.4%, and net written premiums 10% higher. The industry’s combined ratio had eased back to 109% by the end of March this year compared with the 11% recorded 12 months previously. Although the net income of U.S. insurers fell by 7.3% year-on-year for the latest quarter, this still represented a marked improvement on the net loss shown at the end of the 2001 financial year. Notably, net earned premiums rose by 8% for the latest quarter compared with the first quarter of 2001, while net written premiums were up by 10%. The most encouraging sign is the 38% drop in underwriting losses which saw the combined ratio settle back to 102.3% compared with the 106% reported at the end of March 2001.

Feedback from the Canadian reinsurance sector appears highly encouraging as well. Reinsurers were able to lift cat-related covers by up to 50% for the 2002 renewals, and non-cat programs by about 30%. Although there is no consolidated financial data beyond the 2001 yearend – which saw the sector end the year with an alarming 119% combined ratio – companies are feeling considerably more comfortable with this year’s pricing relative to loss experience (but, as many CEOs in this issue’s cover article point out, the cat season is only now beginning).

While the pricing momentum that drove 2002 covers, for both treaty and facultative business, is unlikely to be as strong for next year’s programs, reinsurers are confident of attaining further, meaningful rate increases. “There most definitely won’t be any rate decreases,” is the unified sentiment of CEOs who point out that several years of rate adjustments will be needed to get premiums to risk back to 1992-94 levels. And, despite talk of new capital/new players having entered the reinsurance arena through Bermuda in the post-September 11 marketplace, CEOs believe that this new competition will not undermine the hard market. Quite simply, there is no purpose for any player to throttle the growth prospect of the market by undercutting in the current environment. As one reinsurance CEO comments, “even though these new players no doubt have ‘exit strategies’, I’ve never heard of an exit strategy for only one or two years of being in business”.

So, it would indeed seem that the “hard times” are back, and look to be around for a while. Now, if insurers could only get those pesky claims numbers right…