Looking forward after a challenging year

Swiss Re hosted their 24th Annual Canadian Insurance Outlook Breakfast at the National Club in Toronto on April 2, 2009. The event was well attended and senior executives from throughout the Canadian insurance industry met over breakfast to hear presentations from Swiss Re and Insurance Bureau of Canada (IBC). The event was hosted by Jean-Jacques Henchoz, Managing Director and Head of Swiss Re’s Canadian operations.

After opening remarks by Mr. Henchoz, keynote speaker Brian Gray, Chief Underwriting Officer for Swiss Re and member of the Executive Committee, gave a presentation on the Global Insurance Market Outlook

Mr. Gray indicated that the significant global erosion of insurance industry shareholders’ equity, coupled with a higher cost of capital, signals a likely continued  firming in global Property & Casualty (P&C) markets.  In addition, the sharp reduction in investment yields has placed a higher value on underwriting, even as underwriting results have deteriorated due to soft market pricing. 

He predicted that these underlying factors would cause a broader marketing hardening in the P&C sector, also extending into Casualty and primary commercial lines. In the global Life and Health industry, the deeper erosion of capital and impact of the economic recession are likely to keep pressure on balance sheets until 2011, he said.

Looking further down the road, Mr. Gray predicted that potentially higher inflation over the next decade, combined with the development tail on casualty business, could create a revived risk factor for the industry. The business being written today, he noted, will have claims run-off in an inflation environment potentially more severe than we have seen in a generation. For insurers to forecast and match these long tailed liabilities with low-risk, inflation-sensitive assets, is extremely challenging in the current investment environment.

Barbara Sulzenko-Laurie, Vice President of Policy, introduced IBC’s analysis of the Canadian P&C industry results 2008 to the audience.  Ms. Sulzenko-Laurie noted that the industry combined ratio had increased 7 points in the last year, from 93.8% in 2007 to 101.3% in 2008, and had booked a CDN $ 1.7 billion underwriting loss (adjusted for reserves) and a Return on Equity of 6.1% in 2008.  She stated that this was the first industry underwriting loss since 2002 and mentioned that personal lines insurers were particularly affected, with a combined ratio of 104.5%, while commercial insurers fared better, with a 95.4% combined ratio.

The resulting year over year reduction in total industry capital occurred for only the third time in 33 years in 2008. Mrs. Sulzenko-Laurie commented on the main drivers of the 2008 industry performance, including the constitutional challenges in Alberta and the Maritime Provinces, the lack of government action on Ontario auto, the increasing frequency and severity of climate change-related weather losses, and the credit crisis affecting asset management performance.

Grant Kelly, Chief Economist for IBC, completed the presentation of Canadian results with an analysis of  the economic factors driving the performance of the Canadian P&C  insurance industry. Mr. Kelly observed that the Return on Investment for the Canadian P&C industry has traditionally followed government interest rates, with both rates declining in 2008.  A breakdown of auto loss ratios showed Ontario with double the loss rate of other provinces in 2008.  This reinforced the importance of resolving the Ontario auto situation outlined by Ms. Sulzenko-Laurie.  The total Ontario auto loss for 2008 was estimated at CDN $ 380 million.

Mr. Kelly ended his presentation on a positive note with results from IBC’s public image survey.  The Canadian insurance industry enjoyed the best images ever among the public in 2008, partly reflecting the more active public relations activities by the industry on topics such as climate change, loss prevention and consumer awareness.

The IBC presentation was followed by a Q&A session where the presenters fielded questions from the audience.  The presenters agreed that the conservative investment approaches and regulatory regime in Canada had shielded the industry from some of the major losses seen in other parts of the globe and expressed hope that a brighter future would emerge in 2009.  Jean-Jacques Henchoz closed the breakfast by thanking the presenters and the guests for attending and expressed his hope that everybody would be back for the 25th annual Swiss Re Canadian Insurance Outlook Breakfast meeting in April 2010.

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