The outlook for the Canadian property and casualty (P/C) industry is stable, driven by good demand, strong underwriting discipline and solid balance sheets, says Moody’s Investors Service in a report. However, these trends will be offset by persistently low investment yields and potential volatility from catastrophes.
Consolidation also remains a key theme in the Canadian P/C industry as shown by Aviva Canada’s purchase of RBC General in 2016, among others. Canada’s three largest insurers write 36 percent of industry premiums, up from 30 percent five years ago, according to Moody’s.
“As consolidation continues, industry leaders will benefit from stronger pricing power and the advantages of scale in both distribution and claims,” said Jason Mercer, an assistant vice president and analyst at Moody’s. “There will also be a shift away from using brokers to sell insurance toward direct and agency models.”
Larger groups will also be better positioned to cope with the pressures that the industry is facing from low interest rates that are suppressing investment returns.
Incidences of natural catastrophes could also impact insurers. The largest wildfire in Alberta’s history this year resulted in almost CAD 4 billion of insured losses after the fire destroyed a significant proportion of Fort McMurray.
Personal lines should benefit from short-term stability in Ontario auto insurance as political pressure to cut auto insurance premiums has abated. In August 2013, the government of Ontario announced a mandatory 15 percent drop in average industry auto insurance premiums over the following two years. However, legislation passed during this period to reduce claims costs — particularly with respect to costs susceptible to fraud, such as accident benefits — has helped maintain insurers’ margins.
Product innovation such as usage-based insurance, the sharing economy and cyber security pose opportunities and risks to insurers.
Moody’s said its outlook could change to negative should there be a significant jump in catastrophe exposures, a 10 percent decline in industry capital, or a drop in its GDP growth forecast to below 1 percent. Factors that could drive a positive outlook include P/C pricing exceeding loss cost trends, interest rates gradually rising 2 percent to 3 percent from current levels, and/or materially stronger economic growth.
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