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Canadian Insurance
Market Overview
February 18, 2010
Presented by: Murray Sali
B.Admin, CMA, CAIB, CIP, CRM
Financial Results
• The insurance industry is cyclical and cycles
between hard and soft markets
• The industry has been in a soft-market phase
the past six years now
• The financial crisis which hit Q3 2008 created
uncertainty about how the industry would be
impacted - many expected that the insurance
marketplace would soon harden
• This would have translated into rate (price)
increases and reduced capacity (limits) being
available
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Financial Results
• Luckily, no news was good news for the industry
• No major catastrophes occurred
• Few insurers experienced rating downgrades (which
would have made capital more expensive and harder
to secure)
• Reduced demand for insurance due to the economic
slowdown has increased competition within insurers
as the ability of troubled companies to absorb rate
increases is not there
• Significant excess capacity in the industry has
and continues to drive competition amongst
insurers who want to increase their market share
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Financial Results
If history has proven one thing, it is that the insurance
industry is extremely good at raising new capital after a
crisis. In the 15 months following Hurricane Katrina, the
insurance industry raised $33.7 billion in capital.
When you consider that 60% of capital was raised over the
first half of 2009 when the world was still recovering from
the ‘credit crunch,’ this figure is more impressive.
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Financial Results
• Insurers are not profitable with their insurance
operations alone as is demonstrated by the
combined ratio
• Put simply, for every dollar of premium written
(risk insured), insurers are spending more than a
dollar on paying claims and operating expenses
– Combined ratio for the industry at the end of 2008 was
101.51 – up from 94.27 at the end of 2007
• Reserve (claim) releases in 2008 are masking
the losses being generated on business written
today
– If claims generated from a policy were matched with
the year the accident occurred (“accident-year” results),
the combined ratio would be 105.8 in 2008.
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Canadian Insurance Industry Reserve
Changes
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Financial Results
• Over the past 25 years, insurance companies
have used investment returns to subsidize their
rates
• Insurers invest very conservatively and therefore
did not suffer significant investment losses from
the stock market declining in value
– Investment income at the end of 2008 was
approximately 2.7 Million which is down 36.6% from the
year prior
• However, extremely low rates of return being
earned on investments means that having
underwriting profitability is again critical to an
insurer’s long-term viability
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Financial Results
Policy Subsidization by Investments
Canadian Results
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Market Oversight
• Property and Casualty Insurance Industry in
Canada is highly regulated – insurance
companies must prove:
• Their policy reserves are sufficient to pay claims
• Their capital is sufficient for the company to
remain solvent
• Office of the Superintendent of Financial
Institutions (OSFI) is currently refining the
Minimum Capital Adequacy Test (MCT) in light
of the events over the past year
• Canada’s regulatory framework for the
insurance industry is still considered one the
strongest in the world
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Insurance Market Security
• Aon regularly reviews publicly available
information concerning an underwriter’s financial
condition including:
– Approval by various regulatory authorities;
– Analyses by the major insurance rating agencies, such
as: A.M. Best, Standard & Poor’s, Moody’s and Fitch
(f.k.a. Duff & Phelps);
– Key performance test results which consist of financial
ratios established by the National Association of
Insurance Commissioners (NAIC) for U.S. underwriters
and Standard & Poor’s (S&P) for international
underwriters; and,
– Input from Aon’s global affiliates and correspondents.
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Market Expectations
• The profitability of insurance companies right
now is extremely poor
• However, not all insurers are suffering equally
– Insurers who write personal lines property & personal
lines automobile (particularly in Ontario) are more
challenged to make a profit than those writing
commercial lines insurance
– The loss ratio for commercial liability insurance is lower
(indicating it has been more profitable) than commercial
property insurance
• The results is that some markets are in a much
better financial position and can compete to win
market share based on continued price
reductions
– Less capitalized and unprofitable insurers could
possibly be squeezed right out from writing in certain
segments
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Market Expectations
• The 2009 Q3 results of the Canadian
property and casualty industry
represented a tale of two cities, including
the "worst of times" for personal and
multi-lines insurers and the "best of
times" for commercial insurers, according
to the latest data from the Q3-2009
MSA/Baron Outlook Report.
Source: CIP Society Advantage Daily (Feb 1, 2010)
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Market Expectations
Return on Equity Ratio (ROE) and Combined Ratio for Various Companies
Intact Insurance Company of Canada
Aviva Insurance Company of
AXA Assurances Inc.
Royal & SunAlliance Insurance Company of Canada
Allianz Global Risks
Commonwealth Insurance Company
Factory Mutual Insurance
Zurich Insurance Company
St. Paul Fire and Marine
Chartis (previously AIG Insurance Company)
ACE INA Insurance Company
Chubb Insurance Company
Guarantee Company of North America
XL Insurance
ROE
ROE
Rolling
4 Quarters
Rolling
4 Quarters
Combined
Ratio
Combined
Ratio
Q2 - Prior
Year
Q2 - Current
Year
2008
2009 YTD
9.7
25.6
18.5
9.6
11.7
-2.1
18.0
10.5
10.6
21.1
35.9
17.5
6.8
11.7
0.9
16.0
7.2
10.0
33.1
-3.0
7.7
18.4
7.9
19.0
13.9
7.4
7.6
15.8
98.3
102.0
96.9
101.0
65.2
144.7
139.4
94.8
103.9
70.2
86.0
92.0
96.4
88.5
97.6
101.6
91.4
94.5
77.6
76.3
33.4
101.6
80.2
88.9
84.1
95.1
103.4
91.6
Source: MSA/Baron Outlook Report Q2-2009 & Q4-2008
•A good ROE for the insurance industry is between 12-15%, an
ROE under 8% may indicate possible solvency issues
•With the low interest rate environment we are in, the combined
ratio should be in the mid 80’s to achieve an acceptable rates of
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return on capital
Market Expectations
Key factors contributing to the end of the soft
market:
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Underwriting results are still deteriorating
-- combined ratio is actually at 105.8
Investment revenue remains low
-- conservative investing and combined low rates of
return
Capital in the world is less and liquidity is not
guaranteed
-- “Volatile conditions in capital markets persist and
continue to create uncertainty over the availability of
new capital in the event of significant need.”
Source: Fitch 2009 Global Reinsurance Review and Outlook.
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Market Expectations
• The Canadian insurance marketplace will eventually
harden – the question is when and how severely rates will
increase…
• Some factors which might pre-cede a hardening in the
marketplace are:
– Spike in reinsurance pricing – July 2009 saw a slight
hardening of rates but the January 2010 reinsurance treaty
renewals resulted in stable rates generally. The key will be
how the July 2010 rates will fare.
– Rate hardening in the US – The US economy is starting to
show signs of improvement but will take longer to recover
than Canada. Poor economic results may repress rate
increases into the foreseeable future.
– Major Catastrophic Loss – This would reduce capacity (an
insurance company’s ability to write insurance premiums)
which would decrease competition in the industry.
• Clients with poor loss histories should be prepared for
rates increases regardless
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Questions?