Insurance Mini-Cycles

The Canadian property and casualty insurance industry works in cycles, as everyone knows, but the nature of the market cycles is quite amorphous, making those who can divine its mercurial ways very successful in business. Over the past seven years, Canadian P&C has gone through a number of what I would call crisis-and-response cycles, or “mini-cycles.” These are characterized by brief market contractions, followed by a response, followed by brief periods of recovery.

For example, roughly seven years ago, in 2005, I came to Canadian Underwriter just after Hurricane Katrina swept through New Orleans, causing between $40 billion and $60 billion in damage. Hurricanes Wilma and Rita also pounded the United States, prompting dire predictions of a hard market, including reduced capacity and higher prices. Insurers responded by bringing new capacity to the market. Ten new reinsurers reportedly brought $7.5 billion more to the marketplace.

Insurance-linked securities such as catastrophe bonds and other market-oriented instruments — reinsurance sidecars, as one example — came to the fore. And pricing firmed up.

As luck would have it, the disasters abated in 2006-07. The decrease in claims globally, coupled with decent investment rates and the market response to Katrina, was enough to see a shift to a softer market. That is, until the next crisis happened. The global financial meltdown in 2008-09, caused by investment bankers exuberantly embracing risky credit derivatives, essentially dried up available credit worldwide. In response, politicians lowered interest rates, regulators encouraged low-risk investments like bonds, and insurers saw investment money shrink along with their credit.

Insurers responded by returning to the mantra of “underwriting discipline.”

In other words, pricing the risk according to its potential damage costs and not as a way to steal business from competitors.

Just when a global economic recovery (hesitantly) began to emerge, the next industry crisis hit in 2011 in the form of global catastrophes. Earthquakes in Japan and New Zealand, epic flooding in Thailand, a near-record year for tornado claims in the United States and a wildfire that swept through the Town of Slave Lake in Canada all conspired to eat up a lot of global and local capacity.

Which brings us to the next response. Thus far, global catastrophes have subsided in 2012, as they did in 2006 following Katrina, Wilma and Rita. Only this time, insurers do not have the investment returns they did in 2006. The mantra of “underwriting discipline” suggests some price increases might be in line, particularly in commercial and personal property homeowner lines. But models today are different than the modelling of yesteryear, and more sophisticated analytics today have led to more targeted pricing responses. Also, companies are starting to consolidate and get bigger, as predicted, which is certainly propping up their balance sheets.

So it’s important not to overreact to these crisis-and-response cycles, which seem to be happening every two or three years. These are “mini-cycles” in the sense that they aren’t changing the way business is done over the long term. All of these events are happening against the backdrop of a firm financial grounding. No Canadian insurer has gone bankrupt as a result of any of these events, and Canadian insurers appear to have a good working relationship with a very prudent federal solvency regulator.

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This is my last editorial for Canadian Underwriter, as I move on to pursue another opportunity. But as we all know, one never really “moves on” from the insurance industry. It is everywhere and affects us all, wherever we happen to live or work.

Thank you, all of you, for allowing me a glimpse into the inner workings of this industry. It has been an honour to work here at Canadian Underwriter, which has a tremendous, hard-working and dedicated staff, and I wish all of you the best, and a happy and prosperous future.