Stable outlook for Canadian life and general insurance companies

Ratings agency, AM Best has a lot of good things to say about the companies it rates in both the life and health and property and casualty (P&C) insurance industries in Canada. Although it takes some time for companies and users of company information to grow accustomed to the new accounting regime, it says IFRS 17 impacts have been minimal, not having the negative effects that many feared.

At a recent briefing in Toronto – AM Best’s Insurance Market Briefing on October 25, 2024, AM Best’s analysts discussed both industries in depth, touching on both cyber risks and merger and acquisition (M&A) activity along the way. 

P&C results and outlook  

Among the positive things AM Best says the P&C industry has going for it, they say balance sheets are strong and there are strong levels of risk adjusted capital held by the industry, in aggregate.

Operating performance was favourable in 2023, with results heavily influenced by strong investment returns – an influence which could moderate somewhat in 2024. Rebounding equity and bond markets are also partly credited for the reserve development efforts underway in the industry.

Companies have also moderated their equity exposure – a prudent thing, says Rosemary Mirabella, AM Best director. She adds that they’re confident, most of the time, that reserves are adequate from an actuarial perspective, as well. Financial analyst, Christian Sieria says in 2023, companies increased their retentions, given the hard reinsurance renewal cycle that year, leading to some insurers taking on more risks in the books of business when compared to previous years.

Rising catastrophe frequency 

The ratings agency also notes rising catastrophe frequency and severity saying 2024 is likely going to shape up to be a very bad year, thanks largely to third quarter events. “This trend is very consistent with what we see in the U.S. markets, as well,” says Mirabella.

Although they note that companies have not encountered any reported issues with reinsurance capacity, a derivative effect of increasing catastrophe activity, she says, is rising reinsurance costs. “Also less known or less transparent is the fact that because of the rising reinsurance costs, we see companies having to retain more and take a little bit more balance sheet risk, which, from a credit perspective is a qualitative consideration,” she adds.

In the briefing, analysts also discussed cyber risks and polyfluoroalkyl and perfluoroalkyl substances (PFAs), calling these the new asbestos risk. “The exposure is thought to be very prevalent in Canada, but it’s not yet quantifiable,” Mirabella says.

Artificial intelligence 

The analysts also discussed regulatory attention on privacy, data management and artificial intelligence (AI). “We do think that regulation will continue to evolve in that area,” she says.

In the auto insurance market, they note ongoing regulatory issues causing insurers to exit the market in Alberta and the problem of auto theft in Ontario and Quebec. The auto theft efforts on the part of law enforcement have helped moderate the problem, but auto theft figures remain at all-time highs, they say.

More, people are also still driving really badly after the pandemic, says Mirabella. “And commercial truck drivers, they used to be the safest drivers on the road. Well, they’re not anymore. They’re as distracted as everyone else,” she adds.

When discussing their ratings, the analysts say they expect to see continued growth in insurance revenues going forward and relatively stable market positions.

“The Canadian P&C market has remained stable and solid over a very long term, but also in the short term, as well,” says financial analyst, Michael Buckley, noting that the majority of the industry’s rated entities were rated strongly. Upgrades in 2023 were related to improved financial positions and explicit parent company support. Downgrades, he says, were linked to specific performance issues.

Favorable capitalization 

“For the majority of the rating populations they have favorable capitalization as well as robust enterprise risk management practices,” Buckley says.

They add that personal property, auto liability and commercial property all reported underwriting gains, “which is quite the achievement because that is certainly less true in the U.S. market, particularly on the property side,” Mirabella says.

She commended the Canadian industry during the presentation for its effective risk management efforts related to catastrophe coverage. She also noted that despite a high inflationary environment and resulting increased loss costs, and despite the need to continue to invest in technology and data analytics, the industry’s expense ratios remained in good territory. “We also see that favorably,” she says.

In the commercial property segment, they also note that commercial property loss ratios remain historically low, thanks to continued underwriting discipline and overall risk selection.

Going forward they say they expect hard market conditions to moderate to some extent – the segment is expected to benefit from decreasing inflation and the impact it has on construction costs – but hard market conditions are expected to continue.

Overall, however, they say operating performance is solid and profitable. “We believe that justifies the stable outlook that we have on the sector,” Mirabella says.

COVID-19 impacts 

Although continuing post COVID-19 mortality concerns do exist in the industry and bear watching, and although pockets of group life benefits saw higher than expected mortality (these blocks of business were still profitable), COVID-19 impacts have been minimal to the industry, the analysts say.

Inflation has increased operational costs for some insurers but, at the same time, higher interest rates have helped insurers with strong sales and favourable investment returns. That said, Ed Kohlberg, AM Best director notes that rate cuts can put pressure on certain blocks of business and on future blocks if companies do not react quickly enough.

In investing, meanwhile, commercial real estate concerns persist. Despite low delinquencies, they say the sector, including commercial loans, bear close watching.

Companies are also putting a lot of money and resources into operational challenges, including those posed by their cyber risks. Kohlberg notes that insurers are increasingly spending to upgrade systems and train employees, while reputational risks continue to be difficult to measure (and may not be entirely covered by cyber insurance).

The need for these operational resources, have become a greater challenge to small and mid-sized players, he says, “but also sometimes they can be more nimble.” 

Trends occurring among life and annuity companies generally, not just in Canada, include strong annuity sales, new companies entering the space and digitalization. And while today, Kohlberg says there is enough capacity and enough business to go around, “going forward it’s possible this could change as business strategies change.” 

Overall, the ratings agency says its outlook on the life and health insurance industry is stable, thanks to the industry’s solid capital, balance sheets and shifting investment portfolios. Companies are focusing on products which fit policyholder needs, they add, saying this helps sales and the marketplace in general.

“We are seeing very favourable growth trends in premiums in North America and in Canada as well. Premiums continue to grow,” Kohlberg says.

In addition to Canadian product and geographic diversity, they also note continuing and consistent dividend growth, while share buybacks continue to be popular and leverage ratios are declining. Capital, they say, is generally being deployed on digitalization efforts and on opportunistic M&A.

Overall, they say capitalization has been strong for the industry, investment portfolio quality and company’s focus on reducing balance sheet risks in recent periods have all positioned the industry well going into the IFRS 17 accounting change, which occurred on January 1, 2023. 

IFRS 17 

In the P&C market, Mirabella says it will take a few years before it will be possible to effectively compare accounting regimes, but says the firm is comfortable that there’s not a meaningful difference in the interpretation of results when moving from IFRS 4 to IFRS 17.

“Canada, again, I think compares very favourably (to the U.S. market) from a risk adjusted capital perspective, in both risk adjusted capital as well as absolute equity,” she says.

Life and health companies are also profitable following the accounting change. “Companies have done an excellent job of managing their private liabilities,” Kohlberg adds.

“Solid enterprise risk management has been a thing within the Canadian life insurance industry for a while,” he says. “Companies continue to focus on evolving risks. I think the strong regulatory environment in Canada helped some of the Canadian players to be further along than some players in other jurisdictions.”