Canadian P&C insurers running into problems

One of my long-term macro theories is that insurance may face difficulties in the next few decades. My view is based on macro considerations and has nothing to do with industry-specific issues. My main concern arises from my belief that bond yields will stay low—this is contradictory to consensus views which expect yields to rise due to inflation—and, in addition, returns on assets may also be poor. It may be a surprise to those who haven't looked into the industry, the reality is that many insurance companies do not make much money off underwriting. Instead, they mostly make money off the investment returns they earn by investing premiums. Even a well-run insurer like Berkshire Hathaway wouldn't make much money if its returns on its investments were low.

Well, it looks like the Canadian property & casulty insurance industry may be facing some difficulties. It's hard to say whether this is just a public relations move to placate governments and consumers before hiking insurance premiums, or whether there is more to it.

Here is the story from The Globe & Mail:

Underwriting results, the sector's bread and butter, were once again poor in the first quarter and that is worrisome, he said. Several factors are threatening to batter them further.

Auto insurance in Ontario, a product that accounts for roughly one-quarter of the industry's premiums, has become unprofitable, Mr. Thompson noted.

The province is currently in the public consultation stage of making changes to the rules governing auto insurance, and the sector is very worried about some of the potential changes.

“For every dollar of premium we currently collect on the accident benefit side within our motor premiums, we're paying out something like $1.79 on claims,” said Mr. Spencer. At Aviva, “because of what's going on in Ontario auto, and where Ontario auto's going, at the moment we're looking to probably change the mix of our book towards Quebec, the West and also probably more towards commercial insurance than personal insurance.”

Beyond Ontario, continuing court challenges in Alberta and Nova Scotia could result in changes to the profitability of auto insurance as a result of the impact on injury claims, Mr. Thompson noted. While the uncertainty continues, OSFI is telling insurers that they must maintain conservative capital levels that largely assume the worst-case scenarios.

Meanwhile, homeowners insurance, which was once “a veritable cash cow,” has been impacted by the rising level of windstorms, rain damage and sewer backups, said Mr. Thompson. That's turned what was once a solid performer for the industry into an unprofitable business line.

When it comes to their investment portfolios, P&C insurers tend to invest conservatively, but most were hurt last year when yields on government bonds fell, and many were hurt by the declining stock markets. Going forward, as the insurers' bond holdings mature, it's likely that they will increasingly have to be reinvested into bonds with lower yields.

The first few paragraphs quoted are industry-specific issues and likely aren't an issue in the long run. Insurers will either raise premiums or adjust their business, avoiding unprofitable areas.

The potentially serious problem is the last paragraph that was quoted. Namely, insurers—this applies to any type of insurer—are probably looking at poor returns from bonds and stocks in the future. I don't believe they invest much in alternative assets such as hedge funds, private equity, real estate, gold, and the like, but returns there are also likely to be poor—possibly even worse than the stock market.


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