Best’s Market Segment Report: Canada’s P/C and Life Insurance Industries Remain Profitable Amid Growing Challenges

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OLDWICK - SEPTEMBER 13, 2019 08:24 AM (EDT)
AM Best is maintaining a stable market segment outlook on Canada’s property/casualty and life insurance industries, as the country’s insurers continue to meet challenges in the form of economic uncertainty, regulatory issues and climate conditions.

The Best’s Market Segment Report, titled, “Canada Insurance: Still Profitable Amid Growing Challenges,” states that the property/casualty (P/C) segment’s stable market outlook is based on the following:

• Insurers’ solid risk-adjusted capitalization;


• Profitable operating performance, with breakeven underwriting results amid market and weather-related pressures;


• ·Ongoing refinement of underwriting and distribution capabilities in response to competitive pressures; and


• Continued focus on and evolution of enterprise risk management (ERM).

The Canadian P/C industry was profitable in 2018, albeit less so than in recent years. Earnings were driven by growth in investment income, offset by a slight underwriting loss. The sector’s underwriting loss, which was driven by higher weather-related property results and persistently mixed automobile results, led to a combined ratio of 101.4 in 2018, a 4.3-percentage point deterioration from the previous year. The resulting decline in pre-tax operating income was fairly significant, at 17%. After some minimal capital gains, mixed with some losses in fair value and the impact of income tax, net income declined by nearly half from 2017 to CAD 1.6 billion. The P/C industry’s first-quarter 2019 underwriting loss was far greater than in the first quarter of 2018, due to weather losses; however, investment income has been on the increase.

Inflation and a continual rise in loss severity due to rising repair costs are still affecting auto lines of business. The growing sophistication of automobiles and the rising costs of repair parts and labor, as well as a growing propensity to declare total losses more quickly, do not show any signs of abating. At the same time, cannabis continues to be an area of opportunity for carriers, though many remain hesitant to take on this burgeoning risk. AM Best believes demand for product liability insurance and business owner policy coverage, among others, is likely to grow as the scale and cannabis-related product offerings develop.

AM Best’s stable market outlook on Canada’s life insurance segment is based on the following factors:

• The industry’s focus on maintaining strong regulatory capitalization levels;


• Favorable earnings and underwriting despite low interest rates;


• Diversification of earnings and business profile from growing international segments; and


• Strength of financial flexibility, owing to consistently adequate leverage levels and growth in earnings.

Pretax net income for Canada’s life insurance companies on an International Financial Reporting Standard (IFRS) basis improved year over year in 2018 by 25% to CAD 14.2 billion. Insurance assets grew by approximately 5%, or $60.1 billion, in 2018, compared with just below 1%, or $10.3 billion, in 2017.

Canada’s life industry received a temporary respite from regulatory concerns over the near term; however, significant compliance challenges remain as life writers continue to manage the impact of Life Insurance Capital Adequacy Test (LICAT), which became effective in 2018, and prepare for the expected 2022 implementation of IFRS 17.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=289738 .

A video interview on Canada’s insurance segments with AM Best Financial Analyst Dan Heitlinger and Senior Financial Analyst Anthony McSwieney is available at http://www.ambest.com/v.asp?v=mbcanada919 .

AM Best is a global rating agency and information provider with a unique focus on the insurance industry.