2 reasons why Canadian P&C industry’s hard market may linger

Coming out of the pandemic, the global economic environment still contains two ingredients for ongoing hard market conditions in Canada’s P&C insurance sector — high inflation, and a lack of global reinsurance capacity.

“If you look at the picture behind me…you will see you are looking from a plane downwards,” Jerome Haegeli, Swiss Re’s chief economist, said Tuesday during his keynote address to the Swiss Re Canadian Insurance Outlook Breakfast in Toronto. “The Number 1 question out there is: Are we going to have a soft landing? Or are we going to have a hard landing?

“Throughout the presentation, I will tell you it is much more likely that you’re in for a hard landing. A soft landing is wishful thinking.”

Haegeli spoke primarily about the impact of high inflation rates on the Canadian P&C industry. He observed inflation rates are not expected to meet the bank’s target of 2.1% until at least 2025. Until then, insurers’ pricing will have to account for inflation, which escalates their claims costs.

Lowering inflation by increasing interest rates will be “a multi-year process, and we are on the right path,” Haegeli said. “This morning, the Canadian CPI [Consumer Price Index, which measures inflation by comparing costs in basket of consumer goods] report for March just came out. It’s the lowest headline rate since August of 2021, to below 4.5% That’s great news. That is as expected. But the core CPI was still above 4% and it will take time for the Canadian…CPI to come down.

“The 2% inflation target, don’t expect it to be reached this year or next year, or at least before 2025.”

Haegeli also observed that if the U.S. were to go into a recession in 2023 or 2024, Canada would not be insulated from that. He said he expects the U.S. Central Bank to increase interest rates one more time, up 25 basis points, and then stay put for some time. “Why? Because only then will we reach price stability.”

Until that stability is reached, Haegeli told reporters in a Q&A session after his keynote, “insurance market prices have further room to grow.”

During his presentation, Haegeli noted the Canadian P&C insurance industry had a combined ratio of 85% at the end of 2022 Q4. On the face of it, that’s a good result.

“However, this is also thanks to the $7 billion reserve releases and the higher discount rate,” he told reporters during the Q&A. “If you take these reserve releases out of the equation, as well as the higher discount rate out of the equation, you get a combined ratio of more than 100%, meaning the industry needs to continue to catch up, because economic inflation is a reality.

“And even if you have economic disinflation, meaning low inflation pressure, the fact is the prices will remain high and that will have to be factored in.”

The impact of the global reinsurance market on Canada’s P&C industry also came up during the Q&A. To some extent, a tough reinsurance renewal in Canada — which saw primary insurers confronted with double-digit reinsurance rate increases — resulted in some primary insurers retaining more risk on their books. Should Canada be hit with large natural catastrophes this year, that could be a factor in ongoing hard market conditions.

Asked about the retentions and this year’s reinsurance renewal season, Monica Ningen, Swiss Re’s president and CEO of Canada and the English Caribbean, observed that Canada’s P&C market conditions this year were more in line with the conditions of the overall global economy than in the past.

Globally, she said, “if you look at all the [business] sectors, and you look at return on equity, insurance and reinsurance…sits at the bottom three or four,” said Ningen. “So, until as an industry we can return better ROEs, we’re not going to attract capital, and capital has other places where they can get higher rates of return and more sustainable returns.

“As an industry, we have some work to do to make sure that we’re meeting the consumers’ needs and, at the same time, [to obtain] the capital that we are collectively deploying across the industry, we can get a rate of return that allows capital to come back into the market.

“And I think that [factor]’s also here in Canada. Historically, [Canadian P&C hard markets have] not ebbed and flowed with the global market, and that was absolutely different this year.”

Feature image courtesy of iStock.com/OllgaP