Stéphane L'Espérance

While inflation has been declining for several months and interest rates have followed a similar path, providing insurers with more favorable market conditions, challenges still loom large. Aon’s Fall 2024 update paints a picture of this year’s progress and the challenges that lie ahead for the industry. 

"The complexity and rapidly evolving nature of the Canadian Property and Casualty (P&C) insurance industry makes it extremely difficult to forecast future state," stated Stéphane Lespérance, President of Commercial Risk and Health Solutions at Aon Canada, when the updated was released Oct. 7. He noted that while insurers have overcome the “historical” challenges of rising inflation and interest rates, natural disasters "continue to pressure the Canadian marketplace." 

"As of September, 2024 is already the costliest year on record for insured catastrophe losses in Canada with total losses in excess of $7.6-billion," Lespérance added. This figure is double the losses estimated in 2023. As a result, the economic and financial tailwinds of 2024 may be tempered by a "quicker-than-anticipated shift back to a more conservative stance" due to the frequency of natural disasters, Aon’s update predicts. 

In terms of economic or insured losses, Canada stands apart. Global economic losses due to natural disasters in the first quarter of 2024 were below average. Insured losses, meanwhile, are estimated at US $58-billion for the first quarter, down from US $60-billion during the same period in 2023. 

Reinsurance: One good year does not guarantee a turnaround 

The global reinsurance market has regained stability, with reinsurers’ capital increasing by $25-billion in March 2024 to reach $695-billion by the end of March. However, long-term risks remain a concern, with natural disasters and legal system abuses topping the list. "As yet, a cohort of new reinsurers that typically emerges in a hard market has not materialized, underscoring continued investor uncertainty and a sense that one good year of results may not be enough to restore confidence in the long-term profitability of the reinsurance sector." 

In Canada, while reinsurer capital has modestly increased, Aon expects that the high number of natural disasters in the summer of 2024 will make for tough negotiations in 2025, especially for catastrophe program renewals. 

This will impact the primary insurance market, Aon warns. Insurers will need to develop underwriting and pricing practices capable of absorbing potential losses. 

Automotive: Stability and caution 

The Canadian auto insurance market continues to face growing losses and remains in pursuit of balance, Aon’s update summarizes. In a stable pricing environment that has seen the return of new entrants, insurers are competing for growth, according to Aon. However, underwriting discipline remains stringent, especially as vehicle theft claims and rising repair costs have reduced profitability in this segment, which posted a combined ratio of 92.5 per cent in the first quarter. 

Insurers remain cautious regarding high-risk exposures. Operations involving the transport of hazardous goods or fuel demand prudence, particularly when crossing into the U.S., where the risk of "nuclear verdicts" (exceptionally high jury awards). 

In brief: 
  • Directors’ and officers’ (D&O) liability: The easing of market conditions in this sector is expected to continue for a third consecutive year, with stable pricing in the short term. Uncertainties ahead: insurers warn that current market conditions are unsustainable in the long run. Rate reductions could impact profitability. Legal system abuses, which drive up defense costs, are a growing concern in the market. Bankruptcies, financial instability, and regulatory and legislative changes are also among the risks being monitored. 
  • Cyber liability and technology Errors and Omissions (E&O): Market conditions favorable to buyers persist. Risk differentiation remains key for insurers, as reflected in current premiums. However, the frequency of claims continues to rise, Aon notes, suggesting that favorable market conditions may not last in the long term. The global outage in July 2024 caused by an incorrect update from CrowdStrike reminded both insureds and insurers of the potential scale of issues related to organizational interconnectivity. This segment could become more volatile in the coming years. In 2023, the average cost of a data breach in Canada was $6.9 million. 
  • Commercial liability: The Canadian market ended the second quarter of 2024 with a combined ratio of 74.5 per cent. Coverage remains broadly stable, in a competitive market where insurers have begun to position themselves as either primary or excess players.