Borrowing a phrase from Britain’s Queen Elizabeth the Insurance Bureau of Canada labeled the year 2002 an “Anni horribiles” as it reported that the financial results for the country’s P/C insurers “plunged to a new low.” The IBC is the national trade association of the private property and casualty insurance industry. It represents the companies that provide more than 90 per cent of the non-government home, car and business insurance in Canada.
According to the annual financial report “2001 was the worst year on record for the industry but final financial results for 2002 are even weaker.” Paul Kovacs, IBC’s Chief Economist indicated that “higher prices over the past 12 months were not enough to make up for mounting claims costs and a significant slump in investment income. The past two years for Canadian insurers have been absolutely terrible.”
The report did note that nearly 60 percent of Canada’s insurers reported some improvement in their combined ratio last year. “However,” it said, “underwriting results are still unsustainably weak, mainly for auto insurance.” Kovacs noted, “The market remained very difficult for the whole year. 77% of companies reported lower investment income last year which caused a deterioration of return on equity (ROE) for 53% of the companies.” The industry ROE dropped to 1.6% – the lowest level on record. IBC data is based on year end regulatory findings for some 90% of insurers and reinsurers.
“On a region-by-region basis, significant differences are evident in the distressed auto insurance market, and some provinces are starting to address the urgent need for legislation to deal with the rising costs of providing auto insurance. Atlantic results are dreadful and have been unprofitable for more than a decade. Ontario is the weakest insurance market in the country. Results for Alberta are poor and continue to deteriorate, while the Quebec market remains healthy. More than 95% of the BC market is closed to private auto insurers,” said the bulletin.
“Through the late 1990s, industry premium revenues were stable at almost $20 billion, but for the past couple of years, industry premiums have soared to almost $30 billion-the fastest growth in quite some time” said the report. But despite the premium increases company earnings have been declining. “Since 1997, industry earnings have dropped from $2 billion to a half billion dollars,” Kovacs indicated. “The drop is due to dramatic growth in claims, unfavourable reserve development and weakness in investment markets.”
“Last year saw a hike in insurance prices but industry results are still horrible. The P&C insurance industry has been left vulnerable after five consecutive years of poor results,” he continued. “The hard market is making it even more difficult for insurance companies and their customers.”
Kovacs pointed out that provincial reforms to help control escalating auto insurance claims costs and renewed gains in investment markets might help to restore earnings.