After three years of focusing underwriting discipline, insurers in Canada’s commercial property and casualty space (P&C) are pivoting back to growth. This shift, however, is “unlikely to soften the market materially in the near term,” according to a new report from professional services giant Deloitte.
“While rates may broadly stabilize, troubled industry sectors, like hospitality and real estate, are expected to continue experiencing rate pressure and issues with capacity,” the firm wrote in its State of the Canadian Commercial Property & Casualty Insurance Market 2022.
“While there may be products where the market becomes more competitive on new business with good claims experience, the experts we interviewed observed that underwriters are continuing to scrutinize submission quality, risk characteristics, and ask for underwriting data with a level of rigour that was not present prior to the hard market.”
Deloitte noted that this “tension between discipline and growth” would likely lead to market stabilization in the next few years.
“In prior hard markets, above average performance only lasted two to three years before price competition intensified and rates softened,” it added. “This time, the industry faces headwinds in the form of climate change, inflation, and emerging risks that may slow the onset of a softening market.”
The report described the Canadian commercial insurance market as being “in a period of flux,” experiencing a decade of declining returns, before starting to harden in 2019 and seeing significant improvement in performance across most lines in the last two years.
“That improvement was driven by a broad-based increase in commercial insurance rates, and complicated by the effects of the COVID-19 pandemic,” Deloitte said. “Today, while performance has improved, insurers continue to face both ongoing and new challenges. Trends in claims severity and increasing natural catastrophe events are likely to continue.”
The firm added that claims volume would likely rebound as the economy returns to pre-pandemic activity levels, but new challenges, including increasing inflation and geopolitical turmoil, would put additional pressure on insurers.
According to Deloitte, some of the new challenges that will require prudent management include:
Read more: How is the Canadian P&C insurance sector holding up?
“Because of these factors, insurers are likely to remain cautious despite their improved results,” the firm noted. “Underwriting has become more rigorous over the last three years, and that discipline, and a conservatism in the face of market uncertainty, is unlikely to lessen any time soon.
“So even as the industry turns to growth, the focus on risk quality will likely keep rates stable for the next several years. Whether that will be enough to maintain insurers’ return on equity (ROE) is anybody’s guess.”
