How profitable was Canada’s P&C industry last year?

Last year saw the lowest-ever combined ratio in the Canadian P&C insurance industry, making it the third most profitable year for Canada’s P&C insurance industry since 1975, according to the Property and Casualty Insurance Compensation Corporation (PACICC).

“The 2021 industry combined ratio was 85.2%,” PACICC chief economist Grant Kelly and research assistant Zhe (Judy) Peng write in the latest Solvency Matters quarterly report, released Wednesday. “This is the lowest combined ratio ever recorded by Canada’s insurance industry, beating the previous best of 87.5% recorded in 2006.”

Only in 2003 and 2004 did the industry post a higher return on equity (ROE) than the 17% recorded in 2021.

The positive underwriting results more than offset a $1.3-billion decline in the industry’s investment income. “For those monitoring industry solvency, this is very positive news,” Kelly and Peng write in the article, As Good as it Gets. “It allows insurers to grow their base of capital and ensures that they have resources to pay claims.”

The positive underwriting results were also evident in all segments of the industry in Canada. The loss ratio (claims paid over premiums, excluding expenses) for auto insurance was 58.4% in 2021, compared to 68.8% in 2020. Personal property fared even better at 50.7% last year, improving from the already strong 53.3% reported in 2020.

Underwriting results were also very strong in commercial lines. The loss ratio for commercial property was 45.4% in 2021, a drastic change from 61.6% in 2020.

“Liability coverages also appear to be profitable,” Kelly and Peng add. “The loss ratio for liability insurance was 58.9%, compared to 84% last year.”

The only type of liability coverage reporting losses remains cyber coverage, where the loss ratio was 105.3% (meaning that insurers paid $1.05 in claims for every dollar they collected in premiums).

The Canadian P&C industry saw direct written premiums of about $75.16 billion in 2021, up 8.5% from $69.27 billion. Net claims incurred were down 10.5%, from $37.78 billion in 2020 to $33.83 billion in 2021. Underwriting income saw a massive 262.9% leap to $9.5 billion in 2021 from $2.62 billion two years ago.

Over the past 45 years, P&C insurers have reported ROE greater than 15% on only 10 occasions, PACICC observes. These years of high profitability generally appear in clusters (1977 to 1978, 1986 to 1987, and 2004 to 2006). The average ROE in these years of peak profitability was 16.8%.

In the past, this level of profitability has not proven to be sustainable for P&C insurers.

“Every single time that insurers have reported such above-average profits, competitive forces have quickly acted to cut the industry’s return on equity in half — to an average of 7.4% — within two years,” PACICC president and CEO Alister Campbell writes in PACICC’s annual report. Adds Kelly and Peng in the latest Solvency Matters report: “The high ROEs reported by insurers in 2020 and 2021 are likely to follow this same historical pattern.”

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