Turning Soft…

Some in the property and casualty insurance industry believe that “price stabilization” could translate into “soft market” as insurers head into a new year. U.S. industry results at this year’s half mark already showed a dramatic reduction in the growth between net written and net earned premiums – suggesting that business is being renewed at substantially more moderate pricing.

The Canadian industry has experienced less of an easing in pricing of the overall market. But then, more than half of premiums are driven by auto and non-commercial business (unlike the U.S.). Canadian insurers do report, however, that rates for most commercial lines have stabilized with the industry likely to post fairly healthy financial results for the current financial year – in fact, some in the industry believe that insurers’ return on equity will be the highest since the late 1970s.

Overall, the industry would indeed appear to be returning to a more prosperous state. In the words of Igal Mayer, president of Aviva Canada Inc., “the industry is back on its feet and making money”. Mayer participated in a CEO panel debate that took place at the recently held Insurance Brokers Association of Ontario (IBAO) convention. But, many of the insurer CEOs participating in CU’s annual “primary insurer strategic outlook” (see cover article of this issue) fear that an over confident marketplace could well expose the industry’s old “Achilles’ heel” of aggressive price competition.

And, while the industry may be back on track toward achieving a more healthy market environment, there remain many uncertainties that, the CEOs note, would make even the thought of a returning soft market sheer folly. Charles Lawrence, president of CNA Canada, points out that investment returns remain poor, company returns are hardly “stabile”, prior year development concerns still haunt the industry, claims costs continue to soar, capital availability remains tight, and reinsurance pricing is likely to remain firm. “A failure to commit to underwriting profit in 2004 will ultimately lead to another hard market with 20%-plus rate increases. Are we once again prepared to explain this to insureds?”

Of course, the biggest thorn in the industry’s side is the auto line, the CEOs note. Not only are rates inadequate (despite the rate increases implemented) relative to claims costs, but the very system by which mandatory auto insurance has to be sold is under question. This includes the high-risk Facility Association (FA), which its private insurer members are responsible for any losses that arise. The FA is expected to finish 2003 with an underwriting loss of nearly $500 million – a cost which will drag insurers’ returns down even further. Ultimately, the only cost solution to the auto product lies in reform which requires the cooperation of the provincial governments (thus far, most of the provincial governments where a private auto insurance system exists have been reluctant to reduce insured benefits).

Another “cost factor” that could well deflate the fortunes of insurers is rising catastrophe losses. The Canadian industry has been fortunate in that recent years have not produced significant cat losses. However, insurers’ financial returns for the third quarter of this year will likely show a bleaker picture. Within a three month period, insurers were hit with claims from Hurricane Juan as well as the B.C. fires and floods. According to Insurance Bureau of Canada (IBC) estimates, insured losses arising from Hurricane Juan will likely be in the region of $50 million while the B.C. fires are expected to cost insurers about $200 million. Insured losses resulting from the B.C. floods were still being determined by the IBC. In addition to these large events, insurers also incurred losses of between $20-$50 million as a result of several summer storms that occurred across the country. While the loss exposure from these cat events is paled by the underwriting costs of auto, the industry’s still fragile financial state would not stand up well to the trauma of another “ice storm” or possibly a “Hurricane Hazel” which history nearly repeated this year but for the fact that Hurricane Isabel lost its steam before moving up to Toronto.

Clearly, the industry is a long way off from being “stable”, let alone “over confident”. How will companies behave in the marketplace next year? The CEOs all hope that insurers will maintain “cool heads” – but then, only time will tell.