Why P&C industry profitability is trending toward positive

Canada’s property and casualty insurers should see increased overall profitability and premium rate increases as the industry’s 2023 outlook trends to positive, ratings firm DBRS Morningstar said in a new report.

“The credit rating trend for the majority of DBRS Morningstar-rated Canadian property and casualty (P&C) insurers is positive, in contrast to historically stable trends,” the credit rating agency said in its commentary released Jan. 18. “For the industry as a whole, we expect that higher reinsurance pricing and inflationary trends will result in additional premium rate increases in 2023 as the industry strives to maintain the strong underwriting profitability.”

Overall profitability will also benefit from higher interest income, with maturing fixed income securities being reinvested into higher yielding assets, DBRS added in the report, 2023 Outlook for Canada’s Property and Casualty Insurers Seen Trending to Positive. “Importantly, insurance demand should remain resilient as many types of insurance are mandatory or otherwise seen as a valuable precautionary spending decision.”

However, a poor growth outlook, tighter financial conditions, high inflation, climate-related risks and IFRS 17-related transitional challenges “serve to remind us that good financial performance cannot be taken for granted,” DBRS warned.

“For some, the challenge will be made greater by having to educate their stakeholders on the underlying reasons for the changes in their financial performance metrics,” the credit ratings agency said in relation to IFRS 17.

DBRS also expects that hard market conditions will prevail throughout 2023, resulting in higher property insurance premiums. “However, significantly higher reinsurance prices since mid-2022, and especially at year-end renewals, are adding pressure on insurers to keep hiking premiums,” DBRS said in the report. “Inflation rates, which are likely to remain high by historical standards in 2023, are all the more reason why many customers may see their insurance bills go up.”

And of course, the ever-present threat of extreme weather events, which have intensified as a result of climate change, are contributing to elevated claims costs that are ultimately passed on to insureds. “Overall, we expect to see premium rate increases above the rate of inflation for the foreseeable future.”

On a positive note, insurers will be able to collect more interest income without increasing the riskiness of their fixed income investment portfolio, thereby achieving improved risk-adjusted investment returns, the ratings agency said. “Higher premiums and improved interest income bode well for insurers’ profitability in 2023, but claims remain a big wildcard as catastrophic events can rapidly mute an otherwise positive outlook for the industry.”

In addition to the “inherently uncertain claims outcomes,” a number of different factors may alter the outlook for the Canadian P&C industry. One major factor is the widely-expected economic slowdown, which could lead to business closures and overall fewer purchases of goods and services requiring insurance.

“Nonetheless, we view P&C insurance demand as not very income-elastic, meaning that the demand should remain relatively steady, even as financial conditions deteriorate, as many types of insurance are mandatory or otherwise seen as a valuable precautionary spending decision,” said Nadja Dreff, senior vice president and head of Canadian insurance at DBRS Morningstar.

Feature image by iStock.com/Mongkol Onnuan