Canadian P-C Insurers In Intensive Care?

In 2002, while price hikes pushed direct written premiums up 23 percent, claim costs rose by 16.7, IBC reported.

"The industrys rate of return on investments for 2002 was on par with that of the 1960s. The poor investment rate environment has had more of a negative impact [on the industrys total investment performance, which declined by 20 percent year-on-year for 2002] than the decline in equities. And theres no sense [the industry is] going to get higher [interest] returnswhich means that we have to get our underwriting performance back to where it was in the 1960s," Mr. Kovacs said.

Jeff Rubin, chief economist of CIBC World Markets in Toronto, noted that the Canadian economy is highly sensitive to economic developments in the United States due to the close ties in trade.

As such, he pointed out that long-term interest rates in the United States will likely continue trending downward, with the Federal Reserve possibly being presented with the same "deflation quandary" that confronted the Japanese government through its long recession.

Already, signs have emerged of a weakening Canadian economy, Mr. Rubin observed, with gross domestic product unlikely to exceed 2 percent annual growth over the next couple of quarters, which means that the Bank of Canada will have to reduce interest rates."

And while insurers hold the majority of their investments in bonds, which in a reduced investment environment would mean higher capital values, the biggest challenge facing Canadian insurers at present is lack of income, said Mr. Kovacs. "The industry has a small capital problem at the moment, and a really big income problem."

The recent ousting of the chief executive and other key senior management at Pilot Insurance Co., the Ontario personal lines carrier for Aviva Canada Inc., over a $140 million reserve shortfall became a hotbed of discussion among the primary and reinsurance company CEOs. The shortfall primarily related to auto prior-year reserve developments and amounted to a 50 percent increase in reserves over the prior year.

At the Canadian Insurance Congress, CEOs questioned whether the Pilot announcement is just the beginning of the "mega surprise reserve shortfalls" and if there would be other key management shakeups within the Canadian p-c industry in the year ahead.

"From my perspective, I have to wonder, do we have, as an industry, our own SARS problem, being severe auto reserve syndrome?" Bob Cooke, senior vice president of Toronto-based State Farm Insurance Co., asked.

Based on the current restrictive regulatory environment for personal auto countrywide (a $10 billion market representing nearly 50 percent of premiums written in Canada), and, in particular, for the Ontario marketplace where the combined ratio hit a high of 96 last year, Mr. Cooke predicted more companies will make substantial reserving adjustments.

"I think the Pilot situation surprised everyone. Getting a handle on AB [accident benefit or no fault] and BI [bodily injury] claims in Ontario is very difficult."

Despite the ongoing bleeding through losses on auto, this product is not a "quick get in and out" option, observed Claude Dussault, president of ING Canada, located in Toronto. Specifically, the size of the Ontario auto marketplace ($5.3 billion or about 25 percent of total Canada premiums) means that any major player has to be committed. "Re-entry after exiting is extremely difficult."

And despite auto product reforms having been passed by the Ontario legislator, Mr. Dussault believed that the current industry capital "blood letting" caused by auto would prompt consolidation within the industrys ranks.

(Canadian insurers made auto reserve adjustments totaling more than $460 million for 2002, almost double the 2001 adjustment figure.)

Rick Evans, the CEO of Liberty Mutual Group in Canada, said the underlying problem with auto countrywide is the inflationary expense of health care service, which currently costs the industry about $2.5 billion a year at a compounding rising rate of 16 percent a year. Another factor is that there is no incentive for health care vendors to ensure a quick recovery of their patients.

However, from an overall financial perspective, Mr. Evans maintained a more upbeat perspective of the industrys reserving and capital strength. He said the majority of the reserve deficiencies that emerged last year relate to the 2000 and 2001 accident years. With the industry moving forward with price action, the marketplace has become more stable, he said.

Turning to reinsurance issues, Gerry Wolfe, the chief agent for Canada at Toronto-based GeneralCologne Re, said he believed that the reinsurance property market in Canada "has stabilized" with regard to price actions taken over the past two years. However, the casualty side of the business remains weak, he observed, with auto loss exposure being of ongoing concern.

"I think Ontario auto will continue to be a problem despite reform."

Another problem on the "radar screen" is the recoverability of reinsurance. While it hasnt become a problem yet in Canada, he predicted that some insurers will soon have to face the reluctance by reinsurers pay on claims.

Mr. Wolfe referred to the multibillion-dollar reserving adjustments made by reinsurers in the United States over the past year. "The question is, what is happening in Canada?"

Losses on the auto side remain the greatest concern for both primary and reinsurance companies, concurred Bruce Perry, senior vice president of PartnerRe Canada, located in Toronto. From a reinsurance perspective, the biggest issue on auto is reserve adequacy at the primary level, he added, and the impact this could have on proportional-type business in terms of developing claims.

Sean van Zyl is the managing editor of Canadian Underwriter. (Canadian Underwriter is not published by The National Underwriter Company.)

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 2, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.