Can Canada’s P&C insurers expect a return to the bad old days?

For a while, it looked as if the rosy numbers posted by Canada’s P&C industry in 2021 and 2022 might be short-lived. Several industry observers predicted the good results would lead to softer market conditions overtaking the industry, and more average returns in 2023.

But anyone betting on a reversion to the mean will have to wait, as Canadian insurers appear to be delaying what some consider an inevitable return to mediocre industry results. While numbers for 2023 hold some portends for the future, no sheer cliffs appear to be close at hand, though there will always be some bumps.

Grant Kelly, chief economist at the Property and Casualty Insurance Compensation Corporation (PACICC), writes: “It would be accurate to say that Canada’s P&C insurers are experiencing a ‘golden era’ with significantly higher levels of profitability (even after adjusting for the impact of inflation) than the industry’s long-run real return on equity (ROE).”

He said the first nine months of 2023 proved to be “average at best” for the industry. “However a very strong fourth quarter turned an average year into quite a good year for Canada’s P&C insurance companies…Since 2020, the industry’s real returns are collectively higher than the other 40 years in PACICC’s database,” he notes.

ROE results

The industry’s average ROE has been 14.4% since 2020.

“This is the highest sustained level since 1975-79 in PACICC’s database,” Kelly points out, adding this remains true even after adjusting for inflation. “The P&C industry’s inflation-adjusted ROE between 2000 and 2003 is 10.7%. This is higher than the previous high of 10.4% recorded between 2005 and 2009.”

MSA Research CEO Joel Baker comments further in his MSA Quarterly Outlook Report 4Q-2023.

“The industry ended 2023 with solid results with net income of over $11 billion, up 68% from 2022 as a double-barrel outperformance of combining strong underwriting results…with an $8.6-billion swing in investment return (or a $3-billion swing after net finance income from [underwriting] and movement in investments backing contract liabilities).

“On top of this there was a $3-billion positive swing in OCL [outstanding claims liability, a provision for claims incurred on insured events that have occurred but have not yet been paid], causing Total Comprehensive Income to grow by 169% to $12.2 billion.”

In a footnote, Baker notes the term ‘industry’ in his analysis excludes October year-end filers that are not yet reporting on an IFRS 17 basis, as well as ICBC and MPI.

A new Key Performance Indicator (KPI) created by MSA is the simplified ‘Combined Insurance Service Ratio.’ This new metric came in at 91.4 at year-end 2023, versus 91.0 for the year earlier.

“The Net Combined Ratio (fully discounted), which is closer to the combined ratio of old, stood at 93.6% at year end,” Baker writes. “The industry ROE stood at a very respectable 16.1%.”

And Kelly points out the industry’s healthy ROE as the fifth-highest since 1975: “It’s also the fifth-highest, inflation-adjusted return on equity recorded by Canada’s P&C insurers over this period,” he adds.

Good news?

And yet, as is par for the course in Canada’s insurance sector, Baker cautions the “strong results aren’t evenly doled out. There are differences between sectors and there are wide variations between carriers. Not all is well.”

PACICC’s Kelly agrees, but with a caveat: “Profitability is never shared equally across the insurers competing in Canada’s P&C insurance marketplace.

“In 2023, 20 PACICC member insurers reported negative net incomes. This represents 12% of PACICC’s 168 member insurers.

“We can take comfort from the fact that this number is better than normal for Canada’s P&C insurance industry. In fact, on average over the past five years, some 31.6 insurers report losses each year.”

Glenn McGillivray is the managing director of the Institute for Catastrophic Loss Reduction. This article is excerpted from one appearing in the June-July 2024 print edition of Canadian Underwriter. Feature image courtesy of iStock.com/Enes Evren