Canada’s property and casualty (P&C) insurance industry isn’t faring too poorly, in spite of the many challenges that have faced the sector, according to AM Best, which has determined that the outlook for the P&C market segment in the country is stable.
“The underwriting performance of Canada’s P&C market has been remarkably consistent in recent years, despite challenges year to year,” said Gordon McLean, senior financial analyst at AM Best, during the rating firm’s “Canada 2020: Hot Topics Panel Discussion,” adding that there have been a few key areas underpinning this outlook.
The first of these has been solid risk adjusted capitalization, combined with profitable operating performance and continued breakeven underwriting results, despite an increase in market and weather-related pressures, noted McLean.
“Most of the Canadian market, on a line by line basis, has been enjoying good solid rate, firm to hard market conditions, as well as [the fact] that we’ve seen ongoing refinement and innovation in both underwriting and distribution capabilities,” McLean continued. The latter two developments have occurred in response to continuing market pressures on insurers, as well as changes in consumers’ buying practices.
Canadian P&C firms have also done well in their continued emphasis on enterprise risk management, which McLean noted has been seen across the board in the industry. Nonetheless, the impacts of the COVID-19 pandemic are not to be ignored, alongside other challenges facing the P&C marketplace. Namely, there has been increasingly volatile weather and climate conditions that include events like tornadoes, rain, and fire, in addition to hail and related significant storm losses.
“However, Canada’s P&C insurers have repeatedly shown that they have the capital and the ability to withstand these challenges,” said McLean. “And each of these taken together are all important considerations when maintaining the stable outlook on the P&C side.”
The success of the P&C industry in Canada is particularly noteworthy when considering the struggles facing the country’s life insurance sector, which has received a ‘negative’ AM Best outlook.
“We’ve had a divergence this year in the outlook on the market perspective. AM Best revised its market outlook on Canada’s life insurance to ‘negative,’ and that’s given the significant disruption in the financial markets caused by the COVID-19 outbreak, in addition to the persistently low interest rate environment,” explained McLean. “While most of Canada’s life and annuity insurers maintain strong balance sheets and are likely to absorb the regulatory capital changes resulting from this market volatility, there’s a potential that operating performance could be negatively affected.”
There were two specific factors that led to the change in this outlook on the part of AM Best, the first of which was the contraction in the global economy that is likely to challenge top line growth for Canada’s life carriers, explained McLean. While the equity markets have somewhat recovered since the early days of the pandemic, the coronavirus is far from suppressed and could result in more severe ripples in markets down the road, potentially leading to a prolonged depressed equity market.
“The other important piece is that there’s a growing likelihood of a sustained low interest rate environment, combined with a sharp decrease in oil and gas prices, as well as a drop in demand and in consumer services, hotel, lodging, transportation, and various travel sectors, which we think will continue to have a negative strain on the Canadian economy,” said McLean. “Both of these taken together could result in an increase in potential credit defaults for those [companies] that are weaker or more debt-laden.”
McLean was careful to point out that the revised market outlook on the life side doesn’t necessarily correlate to more negative rating actions by AM Best. Rather, it anticipates headwinds in the operating performance that Canada’s insurers are facing, and underscores that depending on the severity and the length of the current pandemic, this global event could lead to further negative impacts on insurers’ balance sheets.
