Why you can expect more insurance regulation next year
As the hard market proceeds apace in the Canadian P&C insurance industry, a projected economic slowdown in 2024 could invite more insurance regulation, since Canadians will find it harder to pay their insurance bills, a ratings agency warned.
“While growing climate-related exposures, robust population growth, and macroeconomic conditions are supportive of premium rate increases, they may prove to be more and more difficult to execute over time,” DBRS Morningstar said in its report, Canadian P&C Insurance Outlook 2024: Market Conditions, released Monday.
“After years of rapidly increasing prices on a range of goods and services, consumers are finding it more difficult to absorb additional costs, including that of insurance, amid their growing concerns related to the cost of living. In the meantime, regulators are becoming increasingly focused on ensuring availability and affordability of insurance.”
The International Association of Insurance Supervisors (IAIS) represents the insurance regulators of major industrialized and developing countries, including Canada. It issued a call to action in November to address natural catastrophe protection gaps.
A recent IAIS report highlighted how insurance regulation can improve affordability, availability, and uptake of insurance against natural catastrophes. At the same time, certain regulatory actions, such as requiring additional capital or setting price limits, can be counterproductive to the IAIS’s stated goals, DBRS Morningstar noted.
Addressing insurance availability and affordability concerns will be challenging without a meaningful reduction in insured exposures, the ratings agency said. But this carries with it an associated cost.
“One potential way to simultaneously address insurability, affordability, and solvency concerns would be through, all else equal, a meaningful reduction in risk exposures (such as through adaptation and resiliency measures),” the report stated. “In the absence of such a reduction, and in light of growing climate-related risks, we may have an insurance availability problem that carries broader negative economic and credit assessment implications.”
DBRS predicted inflation, higher reinsurance rates, and more severe weather events all point to ongoing premium rate increases in 2024.
Inflation, in particular, has significantly increased insurer’s repair and claims costs.
In auto lines, “as of 2023 Q3, the cost of renting a car is about 67% higher compared with pre-pandemic rates,” DBRS said. “And that’s only one [claims] cost. The prices of new and used cars are much higher, and the costs associated with car repairs and maintenance are materially above the general inflation rate.”
In property lines, “the building construction price index (related to property claims costs) has also been significantly impacted by inflation, peaking at 22% in 2022 Q1,” the report observed. “Despite several quarters of lower inflation in 2023, construction costs are about 56% more expensive than before the pandemic. As a reference point, the general inflation rate implies costs that are about 16% higher.
“We speculate that premiums have not fully reflected relevant [claims] cost increases as premium increases in 2022 and 2023 have been in the low single digits.”
DBRS Morningstar said insurers’ investment returns are on the upswing, as insurers replace maturing bond portfolios with higher-yielding assets. However, the agency cautioned, “improving investment returns will reduce the magnitude of premium rate increases but will not be sufficient to offset them.”
Feature image courtesy of iStock.ca/bernie_photo
