In a context of increased competition, loss activity and positive underwriting results, the Canadian insurance market can now focus on profitable growth.
Professional services firm Aon plc has released its 2022 Canadian Insurance Market Report. The report notes that market conditions are stabilizing, but remain complex as insurers maintain strict underwriting discipline and risk selection.
While structural issues have largely been addressed, 2022 was a year fraught with challenges, which include: “Geopolitical uncertainty, ongoing supply chain issues stemming from the residual impact of the COVID-19 pandemic, economic volatility and climate change,” says Russ Quilley, head of Commercial Risk and chief broking officer for Canada at Aon Canada, in the report’s foreword.
“Inflationary increases to valuations are only one component of the substantial increase in the cost of claims,” Quilley adds in the Nov. 1 release.
Although inflation has materially increased true exposure values, he continues, “there is a significant lack of availability of contractors, supplies and equipment, which is extending the recovery periods for business interruption claims.” All of these factors are driving up the cost of claims, and insurers are adjusting their pricing accordingly, Quilley points out.
Costs resulting from events in the first half of the year will be fully realized by the end of 2022. The report underlines the importance of keeping a watchful eye on how underwriters react to catastrophic losses.
Historically, the largest economic losses occur in the last half of the year, and the Atlantic hurricane season is far from over. Severe convective storms and wildfires continue to wreak havoc, and inflation will also drive up compensation costs.
Catastrophes hurt the returns of reinsurers, making attracting capital challenging. Many reinsurers are mitigating volatility by rebalancing their portfolios.
Global reinsurance capital was $645 billion at the end of Q1 2022. This represents a $30 billion decrease from the previous quarter.
The year 2021 ended with insured claims totalling US$140 billion, which tops the 10-year average of $98 billion.
In the first half of 2022, insured losses from natural disasters amounted to $38 billion, an 18 per cent increase over the annual average in the 21st century.
“Systemic losses and aggregate impacts on the industry continue to be a primary concern for insurers. Some markets are managing their NATCAT exposures by reducing capacity for earthquake, flood exposures, and imposing moratoriums for accounts in areas with a high risk for wildfires,” the chapter on key market indicators notes.
Regarding the capacity outlook, although new insurers entered the market in 2022, capacity is not growing at the same pace as demand.
In 2021, Aon’s total reinsurance index combined rate was 96.2 per cent, an improvement over the 101 per cent average seen in the previous five years. The result is attributable to lower operating losses related to COVID-19.
In 2021, Canadian insurers posted a combined ratio of 83.7 per cent, a significant improvement over the 94.6 per cent of the previous year.
Regarding ransomware and other cyberattacks, the report strongly recommends that clients address their weaknesses and invest in strong risk control measures. These measures not only protect them from future losses, but they are also essential to obtaining cyber coverage.
In commercial property insurance, inflation is affecting rates and capacity. “The increases to total insured valuations (TIV) that markets are insisting on are increasing insured’s overall limit of loss and may result in a reduction of capacity. Clients may need to purchase additional insurance to ensure adequate coverage for the total exposures,” the report states.
Challenging segments in the casualty market of liability insurance remain the same: residential real estate, trucking, mining, roofing, and food manufacturing.
“Markets are particularly concerned with Canadian companies with large U.S. operational exposures (>30%) and are significantly restricting capacity for this coverage. The substantial increase in U.S. litigation costs continue to drive up rates and retentions.”
In terms of directors’ and officers’ liability, Aon notes that “Quebec continues to be a challenging market due to the unique legal landscape pertaining to insurer’s duty to defend requirement, but as legislative amendments being implemented Quebec clients may see an easing of these challenges.”
In 2021, a 34 per cent decline in security class action filings in Canada was observed. In addition, settlement median and average amounts have been trending downward, the report points out.
Regarding professional liability, capacity continued to contract significantly for risks located in Quebec and for construction project underwriting. “The risk appetite constriction in Quebec can also be attributed to the uncertainty arising from the civil code,” Aon says.
The report also includes outlooks on cyber and technology liability insurance, marine, logistics and transportation practice, aviation, environmental, health solutions, surety, legal, crisis management and product recalls, crisis management and terrorism and several sectors.