The Canadian commercial insurance market is in a period of flux, states a new report by Deloitte for the Insurance Bureau of Canada. The report indicates that after a decade of declining returns, the market began to harden in 2019, and has seen a significant improvement in performance across most lines in the past two years. But while performance has improved, insurers continue to face both ongoing and new challenges with trends like claims severity and increasing natural catastrophe events likely to continue.
Prior to the pandemic, the Canadian P&C insurance industry’s profitability had been on a steady decline with net income falling at an annual rate of 8.1 per cent between 2015 and 2019. The industry didn’t lose money, but both underwriting income and investment income declined over the period.
But in 2019 the market began to improve and continued to do so in 2020 and 2021, with 2021 being the industry’s best year since 2005. Net income increased from $3.2 billion (2018) to $10.5 billion (2021). Claims expenses fell driven in large part by the reduction in activity caused by the pandemic. During COVID-19, there was both less auto travel and less business activity. Despite this reduction, premiums were up 8.7 per cent over 2020. The result was a $4.4-billion increase in net income in a single year – the largest annual increase on record. Within commercial lines, the patterns were similar.
While insurers are heading back to growth, there are other problems at play
There is evidence that after three years of exclusive focus on underwriting discipline, Canadian insurers are pivoting back to growth, said the report. However, while rates may broadly stabilize, troubled industry sectors, like hospitality and real estate are expected to continue experiencing rate pressure and issues with capacity. As well, the industry is facing headwinds in the form of climate change, inflation, cyber security and emerging risks that may slow the onset of a softening market. A common expectation is that catastrophic losses in an average year are now likely to be above $2 billion.
These issues are expected to place sustained pressure on insurance costs. “And the current geopolitical and macroeconomic environment is creating significant uncertainty, and that uncertainty will cause insurance executives to continue to be cautious with respect to both the risks they are prepared to underwrite and the cost for the assumption of these risks,” said the Deloitte report. “Under these conditions, it would not be a surprise for modest rate increases to continue for the next two to three years, even as insurer margins return closer to historical levels.”
