Insurance Good Times, Bad Times

Good Times, Bad Times

Why 2021 was a banner year for insurers

by Andy Schwartze

The financial results for Canada’s property/casualty insurance industry came out recently, and there is no point in pretending it wasn’t a banner year for nearly all. With COVID-19 having greatly reduced our mobility and activity levels, claims were down significantly in 2021. That said, every industry has its good times and bad times, and no industry can escape the impacts of cyclical fluctuations.

So why are insurance rates not dropping sharply? It’s a perfectly good question and it deserves an answer—but it might be a tough one for some readers to accept. Just remember that not many business leaders like to see their revenues go down, and insurance managers are no different. Declining sales, driven by the lowering of premiums is something nobody wants to see. Strangely, we are typically focused on the top line, which, if it keeps growing, seems to indicate success. Doing half the sales with twice the bottom-line result, for some strange reason, seems to be a more difficult business model for many to digest.

We need to remember that insurance costs are a product of our societal development. Over time, economies tend to grow, and as a result, the proportionate contribution to insurance will also go up. Anything that we are able to insure will become more expensive over time, and thus the cost of claims will also expand. This is why an experienced insurance broker/risk management advisor concentrates less on the cost of a client’s insurance and more on the percentage of expenses that a business pays for insurance coverage. As long as that percentage stays within a narrow range, the cost of protection remains reasonable. Businesses that grow will see their insurance costs expand, yet the portion of their expense budget devoted to insurance should remain fairly stable.

What we cannot predict, however, is something that is international in nature and very difficult for us to control at any local level. The obvious first hurdle worth considering is inflation. For insurance companies—as for all of us—inflation is a nasty expense that can easily wreak havoc with claims costs. An insured repair is generally one that requires immediate attention and occurs at an inconvenient time. Labour and material costs may be unusually high, or as seems to be the case these days, difficult to access. In the meantime, the clock is running and rental income losses (which are insured) continue to mount. Perhaps mold problems worsen—or tenants may become irritable, and safety might remain compromised. Any number of consequences can arise if a claim is not dealt with quickly and efficiently.

Our last true battle with inflation happened in the late 1970s and early 80s. At that time, a typical insurance policy’s annual renewal would come with a 10 per cent higher premium and brokers became very used to calling this an “inflation increase”. This lasted for a few years until interest rates were able to be lowered again. To what extent inflation will stay with us is difficult to predict. Traditional economists all voice their opinions that inflation can only be tamed when interest rates are pushed to a higher level. Wait and see.

The other important pressure point comes to us courtesy of the reinsurance community. To use a simple example, let’s assume that your apartment building is insured for $20,000,000. The insurer who issues the policy is fully responsible for that entire amount, should the ultimate disaster occur. To avoid such a drastic financial hit, it sells off a significant part of that $20,000,000 to the reinsurance carriers. Premiums have to be shared in a number of possible ways, commissions are exchanged, and the result is that much of the $20 million has been carved up by numerous reinsurers, each of whom participates in the premium and the losses, as agreed. In the past nine years, we have seen an increasing demand for more premium at the reinsurance level. Those costs have to be built into your insurance contract, and in an unusual twist of fate, the rates charged for a very large building have risen at a faster rate than those charged for a smaller building. It is speculated that so far in 2022, reinsurance demands have grown by as much as 35 per cent, and there is little on the horizon to indicate that this will abate.

In 2021 severe weather drained $225 billion from insurers active in BC, Alberta and Ontario. The “derecho” storm in Ontario came close to costing $900 million. The BC floods of last November clocked in at almost $700 million. “So what?” you might ask, figuring that the industry in Canada has more than enough capital to handle some big events. However, reinsurers operate worldwide and when the U.S. Weather Service counts up to 1,000 tornado events by mid-summer and earthquakes hit places like Italy and central Asia, one realizes that we are contributing to those claims from here in Canada.

A recent gathering of leading insurance executives confidently predicted that the “hard market” in the property/casualty space will remain, at least for another year. These predications are always loaded with assumptions which can be sideswiped by any number of unexpected events. Overall, however, we do know that the nasty rate increases of a few years ago have settled down somewhat. To what extent we may see active competition again is almost impossible to predict.

For questions regarding multi-residential housing insurance, please visit: www.takecover.ca