The Canadian property & casualty (P&C) insurance market remains challenging for buyers as 2021 quickly rolls to a close. But there does seem to be some light on the horizon, with rate momentum stabilizing, some capacity re-entering into the Canadian market, and insurers (both domestic and foreign) figuring out their pandemic and post-pandemic risk appetites.
“In 2019 and 2020, we saw tremendous rate pressure,” said Kevin Neiles, president of Western Canada & chief markets officer at Gallagher. “Combined operating ratios were high and return on investments were at a record low. That, combined with increasing claims costs, created prolonged and significant pressure in most lines. In 2021, we have started to see some slowing down of that rate pressure, but we’re not seeing reductions at this point in time whatsoever.
“Certain lines remain pretty challenging and new challenges are emerging in areas like management practices and cyber liability. On the property side of things, we’re still seeing increases, but these increases have moderated to lower percentage increases, and, in some cases, single-digit increases. So, although we are seeing some stabilization in the market, we do still have a long way to go.”
The COVID-19 pandemic has had a significant impact on the insurance industry, from an operational standpoint (forcing insurers to work remotely, use technology, alter communication methods, etc.) to a coverage provided and claims covered standpoint. The full impact of pandemic-related losses on insurers and reinsurers remains a “big question,” according to Neiles.
“Many of the actual insured losses are related to things like event cancellation, with the sport and entertainment industry being a major area where these losses have been suffered,” he said. “But there’s still lots of questions relating to various class actions that have been initiated with regard to disputed business income losses, and these really could take years to determine.”
Regarding the impacts of COVID-19 on insurance coverage and policy wordings, Neiles said there’s been a clear reinsurance-driven requirement for insurers to have clear pandemic exclusionary wording for all lines of cover. Insurers across Canada have continued to provide accommodations for things like mandatory business closures by extending the vacancies period on their policies, but some classes of business that were hit hardest by the pandemic (hospitality, hotels, fitness facilities, live events) are finding it much more difficult to secure coverage.
“Capacity still remains the biggest challenge. Most carriers continue to be very careful with where they allocate their capacity,” Neiles added. “We’re not seeing a large number of accounts seeing capacity reductions again this year, like we have in the in the past two years. In fact, we are actually maybe seeing some increased capacity on well-performing accounts. Things like self-insured retentions and deductibles, though, continue to increase.
“We are seeing a little bit of London capacity slowly return to the market. And we’re also seeing some reinsurance capacity being used in programs and large risks, with a few select domestic markets really being prepared to front this capacity. Large commercial risks, construction projects, transportation and liability towers still continue to be tough in terms of getting the full capacity that’s necessary.”
One significant element that is impacting insurance capacity in Canada is the high level of consolidation that’s occurred in the P&C marketplace. AM Best recently reported that approximately two-thirds of market premium is controlled by the top 10 carriers, which means that the remaining carriers and MGAs – of which there are many – are left competing in a highly fragmented marketplace.
“The consolidation of markets certainly does cause some capacity issues,” Neiles commented. “When markets consolidate, one plus one does not always equal two. And I think it’s important to understand the impact of consolidation and work closely with our insurer partners in order to maximize the capacity allotment to our brokerage, specifically.
“There does seem to be a small amount of new capacity coming into the market, as I mentioned earlier, and I suspect this will continue to be the case as we move into 2022. And I can refer to it here as cautious capacity. In addition, overall, we’re seeing some of the insurers starting to have a greater appetite for new accounts, which is really good news for our clients.”
Moving forwards into 2022, Neiles is cautiously optimistic, but he stressed that there are a lot of unknowns that remain around COVID, in addition to ongoing challenges with the low interest rate environment (which is impacting insurers’ investment returns), the rising frequency and severity of natural catastrophe events, and the ever-increasing cyber threat.
He also pointed out that some factors, such as reduced auto exposure during COVID, and reduced business exposures due to shutdowns, are going to start to ramp up again, which may push losses back towards pre-pandemic levels, and could have an impact on insurance rating for 2022.
“It’ll be interesting to see what reinsurance renewals will look like in 2022,” he said, “and with the uncertainty around the COVID impact that remains, I’m still a little nervous about that. Again, I’ll say we need to be cautious in looking at where the market is going.”
