Why Canada’s auto line isn’t stable — or profitable 

There’s clear reason to be concerned about the stability of the auto insurance line in Canada, given first quarter results of 2024, the Property and Casualty Insurance Compensation Corporation (PACICC) says in a recent report. 

PACICC looked at the new IFRS 17 metric, Net Insurance Service Ratio (NISR). Similar to the old IFRS 4 loss ratio, the new measure will generally produce higher numbers as it now includes acquisition expenses, including commissions and reinsurance as well as the impact of onerous contracts (if any). For most lines of business, PACICC expects the ratio to be below 75% to 85%. 

“A NISR for auto insurance above 80 per cent to 85 per cent indicates that the line of insurance is not profitable, and is likely draining the capital base of the underwriter,” PACICC’s Grant Kelly and Zhe (Judy) Peng write in the article, Diving beneath the surface. “In the first quarter of 2024, 12 of Canada’s 13 provinces and territories reported an auto NISR above this threshold. 

“Nunavut is the only auto insurance market in Canada that is seeing insurers actually increase their capital base,” write Kelly, PACICC’s chief economist and vice president, financial analysis & regulatory affairs, and Peng, research associate. 

Five markets — Alberta, Prince Edward Island, Manitoba, Saskatchewan and British Columbia — reported ratios greater than 100%. And the seven other markets reported a NISR for auto insurance greater than 90%, PACICC reports. 

“Auto NISRs at these levels are not sustainable and indicate likely instability in this market,” Kelly and Peng write. “Insurers will be forced to increase the price that policyholders pay (if regulators will allow it), or reduce their exposure by selling less coverage…or both.” 

In fact, this has already happened. Sonnet Insurance Company reported last month it would phase out its auto operations in Alberta in December. Aviva Canada also said it would phase out its direct-to-consumer home and auto business, Aviva Direct, from Alberta in early January 2025. 

Citing escalating auto repair costs and catastrophic hailstorm damage last August, Manitoba Public Insurance also applied to the province’s insurance regulator for a 3% auto insurance rate increase for 2025-26. This follows an average 8.8% reduction in basic auto insurance premiums over the past two years. 

Auto insurance remains the largest line of insurance sold by Canada’s P&C insurers. The second largest line offered by PACICC member insurers is personal property (homeowners) insurance. Like auto, an NISR above an 80-85% threshold indicates to PACICC that the line of insurance is not profitable for insurers and is likely draining the capital base of the company. 

“Happily, in the first quarter of 2024, 11 of 13 of Canada’s provincial and territorial insurance markets appear profitable,” the article says. “The outliers are Newfoundland and Labrador with a ratio of 83.7 per cent and New Brunswick with a NISR of 90.6 per cent.” 

However, given the long-term trend of increasingly frequent and severe catastrophic losses, it remains unclear if the rate adjustments so far are adequate, Kelly and Peng write. 

Feature image by iStock.com/andriano_cz