Turbulent Stability

A.M. Best Company’s 2014 Insurance Market Briefing — Canada (Toronto)

Experts once again gathered in downtown Toronto as part of A.M. Best Company’s 2014 Insurance Market Briefing – Canada on September 3. Attendees of the half-day, three-session event – addressing developments and goings-on of note in the property and casualty, life and reinsurance segments of Canada’s insurance industry – received both recent information to provide context for current trends and some expectations of how conditions may develop moving forward.

FREQUENCY VERSUS SEVERITY

2013 and 2014 reflect tales of severity versus frequency for the p&c industry in Canada, Joel Silverthorn, a senior financial analyst for A.M. Best Company, suggested during its 2014 Insurance Market Briefing – Canada in downtown Toronto this September.

Frequency has “crept in below retentions” in light of events that include ice damming, frequent storms and continued water events, Silverthorn told attendees.

Unlike what was seen when the combined ratio was about 99 at the end of 2013, the more recent ratio of about 103 means that “this is all being kept. It’s not going off to the reinsurers,” he explained. “This is all part of what’s happening at this moment, because the industry itself is taking on this burden, because it’s a frequency event, not a severity event.”

Also emerging is the prominence of water as a peril, he said, noting that two of the largest-ever Cat losses in Canada took place last year.

The reaction of p&c companies to this development has taken different forms, including measures to exclude part of the risk, Silverthorn pointed out. This has been done by, among other things, raising rates, bringing back endorsements for those who want to buy back in to that coverage and looking at limits.

“Do they have the right data for the flood plains? Are they getting the right data? Is the modelling there? All of these are questions that actually will continue moving forward,” Silverthorn said of queries revolving around water and available data.

Though personal property net loss ratios looked to be going down in 2014 Q1, they began moving up again in 2014 Q2, he reported.

“This is because more hail and weather events did happen in the second quarter. And with these happenings, they’re all events that are going below retention. So, again, frequency events are driving up property loss ratios,” Silverthorn added.

On the positive side – despite record insurance losses in 2013 – the Canadian p&c industry produced a “number that reflects an industry that had learned over the past few years. It had taken rate when it needed to, especially on the property side, and it had been learning from things that had been happening to it throughout the prior years,” he said.

That performance “says a lot to the strength of the industry, where they have come from where they were, and what they were able to do with probably the worst catastrophic year on record,” Silverthorn suggested.

STABLE, BUT WEATHER-BEATEN

The outlook for Canadian insurers remains stable in the wake of a recent turbulent period, but although insurers appear well-positioned to manage ongoing and upcoming challenges, they must guard against becoming complacent, A.M. Best notes in a new report.

“The Canadian P/C market proved to be very resilient in the face of financial and operational pressures from the events of 2013,” states a special report released in advance of the A.M. Best Company 2014 Insurance Market Briefing – Canada. The industry “still managed to eke out an underwriting profit, produce a respectable return on equity and grow its equity base” despite a year that saw insurable losses reach a record $3.2 billion, notes the report.

Those losses were the result of a string of catastrophe losses in 2013. “Although catastrophe events negatively impacted 2013 earnings, A.M. Best believes core performance will continue to benefit from ongoing profitability initiatives, and the industry will maintain its strong risk-adjusted capitalization,” it adds.

“In our opinion, on the p&c side, we believe the Canadian p&c market is well-positioned and we are still maintaining a stable outlook,” Jacqalene Lentz, a senior financial analyst with A.M. Best, said at the briefing in downtown Toronto.

“Stable by our definition is an indication that there’s a low likelihood that there will be significant rating changes over the near term,” Lentz explained.

“The market remains stable despite influences such as investment pressures with the low interest rate environment, and the market remains stable despite consolidation among the carriers,” she noted, although added a caution.

“With these types of pressures, the p&c industry cannot afford to underwrite unprofitable business,” Lentz said.

“We have to adapt; that’s the bottom line,” she emphasized, further suggesting that p&c companies “must continue to build on their underwriting initiatives, advancements in technology and work on getting dynamic and ever-changing enterprise risk management plans.”

The report notes there are challenges for the Canadian p&c industry, including the following:

Risk management and underwriting: Given the prolonged nature of the low interest yield investment environment, the importance of better differentiating underwriting risks has increased.

Ontario auto: The industry appears to have the capacity to absorb the impact of the mandated 15% rate reduction over two years, but each company’s results will continue to be monitored.

Consolidation: In 2007, about 58% of the p&c market was concentrated within the Top 10 insurers; by 2013, the Top 10 cornered 69% of the market. Given overall market dynamics, more consolidation remains distinctly possible.

Demutualization: Now that regulations governing demutualization have been passed into law, the government can move forward with writing and releasing the long-delayed draft.

“The deficiencies exposed by the travails of 2013 need to be addressed so the industry will be well-positioned to respond to any challenges that emerge in 2014 and beyond,” the report adds.

CHALLENGING TIMES

“These are exciting and challenging times for reinsurers, and actually primary insurers as well,” Gale Guerra, a senior financial analyst with A.M. Best Company, said at the Canada briefing.

What is happening in the market today is being heavily influenced by the global leaders, Guerra noted.

“In the reinsurance market, it still remains fragmented with many competing players. The Top 10 players in the market make up 70% of the market capacity, so that’s significant,” she reported.

Reinsurers were helped by conditions in 2013, Guerra said. “Given the lack of any major events in 2013, most reinsurers actually produced very good combined ratios for the year and solid earnings and underwriting profits,” she pointed out.

“2013 and to date in 2014 have been benign Cat years, which has benefited the companies in terms of their financial strength and their ability to build surplus,” she said. As well, “companies are also taking advantage of the low interest rate environments by refinancing debt.”

Combined ratios, for the most part, were below 100%, Guerra pointed out. This, she noted, was “driven, in part, by reserve releases and companies having very well-diversified books of business.”

Although return on equity (ROE) looks favourable, she cautioned that even low double-digit ROEs “will continue to take optimal conditions, including a lack of catastrophes, continued flow of net favourable reserve development for companies and financial markets that are stable.”

Guerra said mergers and acquisitions could continue, but this may take the form of reinsurance companies “trying to diversify and get int o more specialty lines of business.” She added, “we may see more M&A activity, not necessarily between reinsurers, but overall.”

Citing capital market and reinsurance convergence, Guerra noted that reinsurers have had limited losses to date. “What I think is going to be interesting is in a scenario where we have a significant event. Then we’ll see how these new reinsurers really hold up and if they’re really in it for the long term.”