Bedeviled Cycle…

While industry watchers eagerly await the release of insurers’ preliminary financial data for the first quarter of this year, the “bad taste” of last year’s dismal numbers continue to linger – with approximately 80% of insurance companies having now submitted their yearend returns to the Insurance Bureau of Canada (IBC), the adverse loss development for 2002 has jumped by an alarming 19% to $892 million from the $750 million initially reported. The obvious expectation is that auto is the culprit for the increased loss reserving, but the reality is far grimier in that the latest numbers for 2002 show nearly a 150% rise to $247 million for the liability class.

While auto remains a bleak picture, the “upside” to the current hard market cycle was presumably that the rate actions taken by insurers during 2001 and last year were producing meaningful benefits in the other classes of business. But, and in addition to the adverse reserving on auto and liability, insurers had to increase provisions for unpaid claims on commercial business by about $43 million during 2002, leaving only personal lines (excluding auto) with a favorable development of $3.7 million. The significant deviation between the industry’s loss expectation in terms of its reserving during 2002, and the real loss picture emerging, suggests a much more volatile underwriting environment across-the-board.

With insurers continuing to bleed through auto, with the Ontario market having finished last year with a scary 96% loss ratio despite a rise in pricing of 20%-plus, the question that comes to mind relative to the record adverse reserving adjustments made on nearly all classes of business for 2002, is where the industry’s profit recovery is going to come from? And, with the additional financial returns collected by the IBC from companies for last year, there also doubt to whether the modest improvement of the combined ratio to 105.8% from 2001’s 110.4% (as shown in the preliminary IBC report) will hold up in the final numbers. What does this mean for 2003?

Speaking at the recently held Canadian Insurance Congress, the IBC’s chief economist Paul Kovacs highlighted the industry’s ongoing woes with the auto and liability lines (see article on page 20 of this issue for further details). In conclusion, he suggested, however, that the pricing actions taken by insurers, in conjunction with product reform initiatives on the auto side, should result in an improvement in the industry’s financial bottom-line for 2003. Whether or not his presentation (and outlook for 2003) had taken into account the additional $140 million in adverse reserving for 2002, and what impact this may have on the assumed “recovery” underway in the various business lines, would be interesting to know.

The dire conditions which the Canadian property and casualty insurance industry would seem to be facing has to be taken in context with the global environment. Nicholas Smith, attorney in fact at Lloyd’s Canada Inc., recently noted that “…we’re now operating in uncharted waters – waters which some think are perilous” with regard to the deteriorating financial indicators of the global insurance industry. In a presentation delivered at this year’s Insurance Brokers Association of British Columbia (IBABC) annual general meeting and conference (see article on page 40 of this issue for further details), Smith pointed out that the global industry lost about US$90 billion of its surplus in 2001, with last year having likely produced a similar level of deterioration. The net result is almost the loss of 25% of the industry’s global capacity. “That’s a huge drop in such a short time. And, remember, that this is meant to be in the context of a hard market.” He also referred to the high number of rating agency downgrades of companies last year, specifically reinsurers which Standard & Poor’s issued 50 lower ratings and only three upgrades of the top 150 reinsurance companies worldwide. “The facts and stats show that we are working in an industry in the financial intensive care ward.”

All this while in a hard market that has been underway for more than a year – it is hard to comprehend how such devastation could be brought about without more preemptive action by insurers. This may indeed be a hard market within the industry business cycle, but is also a “bedeviled market”. With the immediate outlook for the investment environment being barren, and the financial security of many of the global insurers looking just a little shaky, the 2003 landscape would seem to be highly volatile. And, from a Canadian perspective, the only happy ending on the underwriting side can come about by bringing auto back into profitability. Insurers can shun auto and all its problems, but that leaves a very small slice of the total premium pie in Canada which if seen from a global perspective, hardly warrants the infrastructure expense of the international players where the game is about volume efficiency. So, what about 2003?