Can insurers and reinsurers survive looming NatCat trends?

One of the hallmarks of a warming world is that you never know what may come next.

The reasonably stable climate of the last 100,000 years is being thrown into disarray as Earth’s systems are forced out of kilter.

For (re)insurers, that means not knowing what kind of a NatCat year might be experienced. Will it be a $1-billion year? Or $2 billion? Maybe $4 billion or $5 billion? Or will we break entirely new ground with something higher?

Severe weather in 2022 cost Canadian insurers and their reinsurance partners $3.1 billion. That’s among the Top 3 years for annual NatCat losses, including 2016 (the year of the Fort McMurray wildfire) and 2013 (the year of the Southern Alberta and Toronto floods).

Catastrophe Indices and Quantification Inc. (CatIQ) declared 15 NatCat events last year. NatCat events cause a minimum of $30 million in insured damage (up from $25 million previously due to an occasional adjustment for inflation).

Just two of these events amounted to two-thirds of the year’s total damage: the May derecho in Ontario and Quebec cost the industry $1 billion, while post-tropical storm Fiona in Atlantic Canada caused more than $800 million in insured damage.

One common theme running through last year’s storm losses is the sheer size of the storms.

From a spatial extent, the derecho (1,000 kilometres long at one point), Fiona, and a December ‘bomb cyclone’ that affected Ontario, Quebec, and Atlantic Canada were huge storms, spanning large geographic areas. As I noted in a February 2023 Canadian Underwriter insBlog piece, ‘Far and wide,’ large storms such as these challenge individual insurers’ ability to manage their concentrations of business and place smaller regional players at great insolvency risk.

So what’s ahead?

Canada’s P&C insurers reported a return on equity (ROE) of 18% in 2021, the Property and Casualty Insurance Compensation Corporation (PACICC) noted in its 2022 annual report.

“These results were unsustainable for a highly competitive industry,” PACICC added.

“2022 financial results posted by Canada’s P&C insurers represent the beginnings of an expected ‘reversion to the mean’ and a return to historically ‘normal’ levels of profitability. In the third quarter, the industry reported an ROE of 13.3%. This is still higher than the long-run average of 10.1%. So, based on historical patterns, it appears probable that there is further deterioration to come.”

The industry performed decently in 2022, but it must be underscored in no uncertain terms that results were significantly pushed along by a massive reserve release, higher interest rates (which are actually a double-edged sword), lower losses and higher premiums.

The numbers did not come purely from astute operational performance by all carriers across the board.

Indeed, PACICC noted 14% of insurers still reported negative net income in 2021, despite it being the industry’s most profitable year on record. In 2022, the figure rose to 27.8%.

That suggests a reversion to the mean is afoot. It’s just a question of how long the process will take.

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/wenmei Zhou