Stability, with Challenges

A.M. Best’s 2013 Insurance Market Briefing: Canada, Toronto

Toronto again played host to A.M. Best Company’s 2013 Insurance Market Briefing – Canada on September 11 in Toronto. Attendees were provided both a look back and a look forward as leading A.M. Best rating analysts discussed the impact of economic conditions and rating trends on insurers in the property/casualty, life and reinsurance segments of Canada’s insurance industry.

OUTLOOK STABLE FOR CANADIAN P&C

The Canadian property and casualty insurance industry is recording solid performance, despite several ongoing challenges, says an A.M Best report released in advance of its Canadian briefing.

Last year was the fourth consecutive year that combined ratio improved and net premiums written increased, notes Best’s Special Report: Canada Property/Casualty & Life. Net underwriting income in 2012 was $1.5 billion compared to $474 million in 2011. It is expected “core performance will continue to benefit from profitability initiatives and the industry will maintain its strong risk-adjusted capitalization.”

Nonetheless, there are challenges. For example, in Ontario, while reforms to the auto insurance regulatory environment in 2010 and rate increases have offset rising claims costs to an extent, the province has also seen a deteriorating loss ratio in auto liability. There are also concerns around auto with respect to the Ontario government’s promise to reduce insurance rates by an average of 15% over the next two years.

“Although there is no mandate for an across-the-board rate cut, A.M. Best remains concerned about implementation and whether this is the most efficient industry solution, particularly in light of ongoing issues such as: combatting fraud, defining catastrophic impairment and reducing the backlog of claims in mediation,” the report says. “Essentially, significant premium reductions without additional reforms under the current system may not be sustainable and may expose the P/C industry to significant capital risk.”

Going forward, changing regulatory requirements, the “appropriate development and utilization” of telematics technology for auto insurance, and predictive modelling for risk management will be key issues for the Canadian P&C industry.

UNDERWRITING DISCIPLINE KEY

Underwriting discipline is keeping the outlook for the reinsurance market stable, in the face of downward pressure on pricing and continuing low interest rate challenges, said Scott Mangan, a financial analyst for Caribbean and reinsurance ratings at A.M. Best. Overall, Mangan told attendees, the reinsurance market in Canada is well-capitalized.

On a five-year basis, the reinsurance market has had an average combined ratio of 95.4%, he reported, adding the Canadian reinsurance market marginally outperforms its global counterpart.

Although most reinsurers in Canada remain well-positioned to take on a “mega-cat” event – that being a loss of $100 billion or more – like reinsurers elsewhere, they are still contending with low interest rates that continue to be a challenge on a global scale, Mangan said.

That has been one driver of capital markets entering the reinsurance sector, he noted, citing catastrophe bonds and sidecars as the main vehicles being used.

He suggested, however, that a spike in interest rates does present a risk for the industry. Still, “we believe that reinsurers are well-positioned to handle that if that were to occur.”

Another risk is continued downward pressure on pricing, which could squeeze underwriting margins, Mangan said. “Underwriting discipline has been a very important factor,” he explained. “As you see capacity increasing, pricing is… being pressured.”

Looking to January 1 renewals, he said there could be potentially more focus on terms and conditions than on pricing.

Overall, Mangan said, A.M. Best’s ratings outlook for the reinsurance sector is stable. “It’s underwriting discipline that is the anchor for the reinsurance market, and if that were to slide, certainly we could see some changes on that regard.”

 CONSOLIDATION AS ADVANTAGE

Vast consolidation within Canada’s property and casualty industry on the carrier side has created some large organizations with a wealth of data that could offer a competitive advantage, said Greg Williams, managing senior financial analyst in A.M Best Company’s property/casualty rating division.

Williams told briefing attendees that the Top 10 p&c companies in 2007 accounted for about 58% of direct premiums written, around 68% in 2011 and approximately 73% now. “That gives them access to a considerable wealth of data that they can use and most likely – if they have the systems to support it and integrate the data – will have the ability to create competitive advantages in terms of the data capabilities and pricing segmentations,” he said.

“The leveraging of technology, the scale and the efficiency is going to have some implications on the other carriers,” said Williams. “Conversely, there are also some opportunities, probably in the niche markets, under certain markets,” he added.

Williams’s comments reflect the outlook in the special report released before the briefing.”In the coming year, insurance companies will continue to face challenges of finding alternative uses of capital and trying to remain competitive through gains in market share. Mergers, acquisitions and consolidation will continue to be instrumental in meeting those challenges and shaping the direction of the Canadian P/C insurance industry,” the report states.

“These consolidations not only will test companies’ abilities to maintain strong customer relationships, but as these entities grow larger, more complex and perhaps dominant in a segment, they also will test the limits of market share and integration.”

During the briefing, Williams noted that consolidation continues not only at the carrier level, but also at the broker level. “Obviously, that creates flux in the competitive environment,” he said.

“Just like companies are concerned about diversification, brokers are concerned about diversification,” he said. “It’ll be interesting to see how this shapes up as technology and data really become the lifeline of auto, especially as it turns more into a commodity product.”

Williams said there were no rating downgrades in 2012 through June 2013, reporting that about 85% of rating upgrades were through affirmations. The remaining were upward rate movements, the majority of which were “driven by consolidations,” he said.

 COMBINED RATIO TO CLIMB SLIGHTLY

The combined ratio for property and casualty insurers in Canada could climb to about 100.0% by the end of the year, depending on catastrophe activity in the fourth quarter, A.M. Best reports.

As has been the case for some time, Ontario auto insurance continues to be of significant interest, particularly since the provincial government has mandated cutting premiums an average of 15% over the next two years. “(The) major impact for us specifically will be Ontario auto,” Karen Higgins, vice president of finance for Co-operators General Insurance Company, reported in a video released by A.M. Best following the Canadian briefing.

“We have for the most part priced in, or will by the end of 2013, the requirements of the proposed Ontario reform.”

Canada’s lack of a public-private flood insurance program also proved a hot topic, churned up once again by devastating and expensive flood events in southern Alberta and in and around Toronto.

There is no hard date when or if such a program will be created, but the federal and some provincial governments are looking at mitigation plans and investing in infrastructure, Craig Harris, lead freelance writer for Canadian Underwriter, noted in the video. That said, developing flood risk maps, investing in infrastructure and imposing building restrictions i n high-risk flood zones areas are all likely to be necessary for a flood insurance program to move forward, Harris added.