Property and casualty (P&C) insurers typically rely heavily on investment income to determine their overall financial health and success. Investing premium income into things like stock, corporate and government bonds, and real estate mortgages is an integral part of P&C insurers’ financial risk management, especially given the volatility of underwriting profit (their other key source of income). It’s risky for firms to rely solely on underwriting profit because – as many P&C insurers are experiencing amid COVID-19 – just one catastrophic event or natural disaster can throw a year’s worth of underwriting profit into the red.
The balance that most P&C insurers strive towards is a combination of profitable underwriting and low-risk investments. This has worked for many over the years and is, generally speaking, a safe strategy. However, the COVID-19 pandemic has really thrown a wrench in the works. Deceleration in the Canadian economy as a result of pandemic closures, travel restrictions, and social distancing mandates has caused a drop in the valuation of equity investments and fixed-income assets – two things P&C insurers typically invest heavily in.
Dave Smiley, chief operating officer at Unica Insurance, described the “marked drop in the Canadian economy” as one of the big challenges to come out of the pandemic. He told Insurance Business: “It has really impacted our investment income. Insurers rely rather heavily on investment income. As an industry, we’re often happy to pay out $1 in claims and expenses for every dollar we bring in, because we rely on our investment income to make our profits. But when the investment market drops, that puts some real strain on our results.”
Despite experiencing some financial “strain,” Ontario-based Unica Insurance has so far managed to maintain profitability throughout the pandemic. Smiley attributes this “better than planned” performance to the firm’s focused underwriting strategy, and also to improved loss ratios across the firm’s portfolio in niche commercial lines and VIP personal lines – a portfolio with lower exposure relative to the pandemic than some of the more generalist P&C insurers.
The COVID-19 pandemic has struck at an interesting time for the P&C insurance industry. It’s piggybacking a few tough years whereby insurers have experienced increased frequency and severity of losses across multiple lines, in particular auto, property and certain liability lines. To offset this, insurers have been increasing their pricing significantly since 2019, and this trend has continued so far through 2020.
Read next: Aon reports its Q2 results
“The resulting positive impact on underwriting profitability may help mitigate some of the effects of the coronavirus-driven financial market volatility on investment portfolios, as companies may offset investment losses or depressed investment income with higher underwriting revenues,” explained DBRS Morningstar’s Victor Adesanya and Marcos Alvarez in a market commentary entitled ‘Coronavirus: Limited Claims Impact on Certain P&C Lines but Financial Markets’ Volatility will Affect Investment Portfolios’.
But while rates may be up, the pandemic-induced downturn in the Canadian economy has resulted in a decrease in the levels of P&C insurance premiums contracted by families and companies. Marcos Alvarez, senior vice president and head of insurance at DBRS Morningstar, commented: “We consider that a moderate scenario with premiums falling 4%–6% in nominal terms is still manageable for most Canadian insurance companies.
“However, under an adverse scenario with premiums decreasing more than 10% in nominal terms, we anticipate weaker companies experiencing a material deterioration in their credit profiles and financial strength, particularly in the context of a prolonged recession with persistent investment losses and higher coronavirus-related claims.”
Insurance brokerage giant Arthur J. Gallagher reflected on the above scenario its second quarter, first half financial results, released on Thursday, July 30. The broker said it has experienced some decline in client retention and renewal customer exposure units (i.e. insured values) but that those declines were mitigated by rising premium rates in mid-to-high single digits across most geographies.
