What the math says about P&C return rates

What’s a reasonable rate of return for Canada’s property and casualty insurers?

According to Craig Pinnock, chief financial officer at Northbridge Financial Corporation, for the insurance industry, it could sit anywhere between 5% on the low end, 10% on average, and 20% would be the high end.

Ideally, a primary insurer should maintain a combined operating ratio (COR) of between 90% and 95%.

“Now let’s do the math,” he said during IIC’s GTA Symposium. “Five per cent [profit] is 95% [COR]. Most of us do a happy dance at 95% [given the historical run rate]. A 90% [COR] is [a] 10% [profit]. And 80% [COR] enforces the 20% margin.

“We as an industry have not seen those numbers consistently for any period of time. We’ve had a little bit of that in the last few years, depending on the organization. So, our standard for [profit] margins is pretty thin when we start out [and] that’s what makes it harder to say the consumer does not get impacted by [the current reinsurance] cost increases.”

However, reinsurance prices that hit the P&C industry early this year may not make it down the chain to consumers if insurers remain prudent about whose risks they choose to write.

This may mean abandoning the take-all-comers mindset that’s so ingrained in the P&C industry. And that’s where concentration management comes in.

“A lot of [insurers] are really focused on concentration management, more so than ever before,” David Mamane, financial services senior analyst at RSM Canada told Canadian Underwriter.

“They’re being more intentional around how much risk they write, in what areas they write, really paying attention to topography…assessing true wildfire risk, flood risk and making sure that they’re consciously underwriting.”

Short-lived insurance contracts are commonplace now that consumers tend to shop around. However, most insurers aim to hold onto their clients as long as possible, making concentration management a tricky equation.

Retention is a problem

For insurers, unstable retention patterns create “this underlying risk of, ‘If I build concentration [of risk] too fast, too much, it will lead to my reinsurance costs going up long-term, and then the viability of that business model being challenged,’” said Mamane.

Property lines are experiencing increased claims costs and supply chain issues.

And P&C insurers paid out more than $3.1 billion in NatCat claims in 2022, which is a significant factor in their reinsurance costs rising this year (a year which, so far, has seen a high share of NatCat events). Consequently, property underwriters are focused on the details.

“Something as silly as the home [being] six feet above street level, rather than two feet above street level — that can make a massive impact in terms of flood risk,” he said.

This article is excerpted from one that appeared in the June-July print edition of Canadian Underwriter. Feature image courtesy of iStock.com/domin_domin