Will markets soften after 2022’s strong performance?

For 2021, a year-in-review for the P&C industry began with the sunny news that it “was the most generally favourable for Canadian insurers in a long while.”

But that same review ended with the suggestion that those rosy numbers may be short-lived and the industry may want to prepare for less favourable results sooner rather than later.

With preliminary 2022 numbers now in, it looks as though insurers can breathe a bit easier, at least for the time being. But breathing easier doesn’t mean resting on laurels, as the 2022 industry results came with both caveats and omens.

According to MSA’s Joel Baker, the 2022 year-end results revealed the market “more or less held its own and returned solid underwriting results with a combined ratio of 85.4%.” However, as he observed in his MSA 2022 Q4 report, this was in great measure due to a ‘historically large’ reserve release of $7 billion, without which the industry’s combined ratio [COR] “would have been closer to 96[%].”

Baker also identified a positive bump provided by the current high-interest-rate environment, since “loss reserves are discounted at higher rates.”

Without considering the discounting, the industry’s COR would be closer to 91% “even with the reserve releases,” said Baker. “Take out the reserve releases and the industry is running at over 100[%].”

The 100% number indicates the industry is, on average, breaking even.

So, “what looks good at first glance, looks worse when examined deeper,” he observed. “Industry results are slipping.”

Interest-rate pressure

Pulling down the rosy facade reveals a bleaker picture. Baker noted the ‘dramatic hit’ the industry took because of escalating interest rates and volatile equity markets on the investment side.

“The impact on the Canadian P&C industry was dramatic, wiping out investment income and doing a number on OCI (other comprehensive income – which is marked-to-market). Net income, comprehensive income, and even capital are down compared to year-end 2021 as a result.”

The direct written premium (DPW) growth of just 1.5% in 2022 barely kept up with inflation, causing Baker to wonder whether this could be a harbinger of a softening cycle. “Yes, for personal lines, not yet for commercial lines and reinsurance,” he wrote.

Overall, Canada’s P&C insurance industry booked total underwriting income of $9.96 billion ($10.47 billion for 2021), and net income of $9.02 billion ($10.6 billion for 2021) on $83.4 billion of DPW. Key industry ratios came in at just over 54% (loss ratio) and 85.5% COR, with an industry return on equity (ROE) of 13.63%.

Personal lines writers “appear to be slipping into soft market territory,” Baker cautioned. Top line premium essentially matched inflation, but underwriting income dropped 32% compared to the same period the previous year.

And, Baker noted, when reserve releases are backed out, “the COR sat at an unprofitable 102.1 (even worse if you back out discounting).” And with “investment results on the ropes,” he added, “the personal/multi-line sector is heading the wrong way.”

Commercial cohesion

Canada’s P&C commercial lines sector (minus Lloyd’s) stayed ahead of inflation with DPW “up a healthy 12%, NPW [net premiums written] 10.5%, against a 2% increase in claims offset by rising acquisition and general expenses,” Baker wrote.

Carriers operating in the market managed a COR of 76% and an ROE of 14.5%. The sector also benefitted from “generous year-end reserve releases.”

Grant Kelly, vice president and chief economist for the Property and Casualty Insurance Compensation Corporation (PACICC), said commercial “results were particularly strong in liability insurance, with a loss ratio of 33.6% in 2022.” He observed in the April 2023 issue of Solvency Matters, “This is both remarkably low and highly unlikely to be sustainable over the long term.”

Regarding reinsurance, “strong growth coupled with lower losses yielded a COR of 74[%], ten points better than a year earlier,” Baker said.

Discounting, he added, led to a nearly 12-point boost to the COR, which would have been closer to 86% on an undiscounted basis. Despite a $3.1-billion NatCat year, improvement in the sector’s results is due in part to the one-two punch of higher NatCat retentions on the primary side and higher rates on the property NatCat side.

Glenn McGillivray is managing director of the Institute for Catastrophic Loss Reduction. This article is excerpted from one that appeared in the June-July print edition of Canadian Underwriter. Feature image courtesy of iStock.com/Ekspansio