What’s driving Canadian insurers’ reinsurance rates?

An exceedingly tough reinsurance cycle saw insurers quoted double digit rate increases upon the Jan. 1 2023 renewal.

Some portfolios without a significant loss history saw increases of 25% to 30%, while other portfolios with losses saw their reinsurance rate increases climb as high as 50% to 70%, Donald Callahan, managing director of Guy Carpenter Canada, said during a Canadian Underwriter webinar on Wednesday.

But Canada, which had insured NatCat losses of $3.1 billion last year, has a much smaller market than in the U.S., where insured losses were in the neighbourhood of $100 billion, Callahan noted Wednesday during the webinar, What happened at the January reinsurance renewals? Also, Canada experienced lower inflation than regions like the U.K. or Germany.

And so Callahan questioned whether Canadian insurers were paying higher reinsurance rates in part because of the much larger risk exposures in the United States and Europe.

For example, Callahan pointed out that inflation in Canada was closer to 7%, while inflation in other regions, like the U.K., was closer to 10%, or in Germany, which was closer to 9%.

“I often felt that the factors that reinsurers were applying to Canadian business were probably a little bit overstated, because much this decision-making was being made in environments that have had higher inflation,” Callahan said.

Also, Canada is also not a significant Cat loss driver, he explained. “If you look at Canada as a Cat loss driver in the world, for the last 20 years, we’ve run about $30 billion of insured Cat losses, which is about 2% of the global total. The U.S. has run [roughly] $1 trillion, for about 60% of the global total.”

“U.S. Cat losses for the last 20 years are roughly 30 times that of Canada, and as a result of Canada not being a particularly large market, I think we got caught up in that trend.”

Claus-Ulrich Kroll, president and CEO of Munich Reinsurance Company of Canada, discussed some of the important factors driving reinsurance pricing generally. “It’s fair to say, in general, there were several drivers that increased the premium for reinsurance, and also the rates,” he said in response to Callahan’s observation.

These drivers included an analysis of the Canadian P&C insurance market specifically, he noted. 

First, he said, the underlying primary insurance industry in Canada has grown, which has an impact on reinsurance price. Second, the Canadian P&C insurance industry had to catch up on inflation from the previous renewal.

“…Nearly all experts underestimated the inflation of 2022 in the renewal before, so that means it was a bit of a catch-up play for inflation in 2022, and then we [considered] the inflation [for] 2023 [on top of that],” Kroll said.

Plus, reinsurers regularly update their Cat models to adjust for frequency and severity of claims, which could translate to potentially higher reinsurance rates.

“From my perspective, when it comes to inflation, or when it comes to the impact of climate change, Canada’s not different, because we have the same inflation here, maybe with some differences in certain areas, but also the [same] impact of climate change.” Ulrich-Kroll said. “But what is probably special to the Canadian market [is], if you compare the Canadian property Cat market to Europe or the U.S., the Canadian market is still buying comparatively low or lower than the two regions.”

Canada still holds risk, noted Liam McGuinty, vice president of strategy at Insurance Bureau of Canada. 

“In that sense, we’re punching above our weight relative to our population versus the global population,” McGuinty said in response to Callahan’s observation that Canada only comprised about 2% of the global Cat losses. “But still, we are a riskier place to insure and invest. 

“One of the things we’ve been encouraging the government to do is think about its role in mitigating property risk factors for businesses and homeowners,” he said. “Whether it’s relative to flood, [such as the] National Flood Insurance Program, which is a really good step and in mitigating property risk in Canada, but also something as simple as [improving] national building codes.” 

When it comes to building codes, McGuinty said, “We’ve got this archaic model where we update codes in a non-binding way every five years, then we leave it to provinces and territories to incorporate that national model into theirs, and there can be a lag.” 

Kristen Gill, head of personal insurance at Aviva Canada, observed that each primary insurer has a different appetite for volatility — particularly when it comes to retention. Retaining the risk, and not transferring the risk to reinsurance, is one way for primary insurers to lower their reinsurance rates.

“Different companies will be more or less adverse to the volatility, potentially increasing [or decreasing their] retention,” she said. 

Gill made her comments after Callahan observed many Canadian insurers had higher retentions during the 2023 renewals. 

Feature image by iStock.com/sesame