The first quarter of 2020 didn’t go as planned for insurers around the world, with many revealing losses due to the impacts of the coronavirus. Back at home in Canada, the fallout from the pandemic hasn’t been as severe as in other markets. Just look to Intact Financial, whose net income contracted by 33% from the same quarter last year, yet its financial performance remains on track and it continues to hold a strong capital position, according to CEO Charles Brindamour.
The Canadian insurance industry was more broadly well-positioned before the crisis hit, according to Alister Campbell, president and CEO of the Property and Casualty Insurance Compensation Corporation (PACICC). Moreover, over the short-term, the dislocation in capital markets that occurred in Q1 when the coronavirus unfurled its wings produced dramatic declines in equity values, yet Canadian insurers were “disproportionately in bonds and fixed income securities, and not in equity,” he said.
“In fact, we did a review at PACICC and literally half of the industry had no equity in their portfolios,” explained Campbell. “Some had larger portfolios, often larger companies, but half the industry was not exposed to the dramatic declines in the capital markets on the common equity side.”
Pointing to Intact’s results, he called the net impact “adverse, but not material,” since the insurer is one of those that has a larger common equity portfolio and more preferred shares compared to others. This effect is reflected across the industry.
“We would anticipate from a PACICC perspective that the short-term capital market impacts are unlikely to have material adverse consequences for the Canadian industry,” added Campbell. “That’s good news, and an attribute to the prudence of the industry’s capital management and the prudence of our regulatory environment.”
The Office of the Superintendent of Financial Institutions (OSFI) has proactively responded to the pandemic and has signalled flexibility in part by announcing that premium payment deferrals would not increase capital charges on outstanding premium as well as by postponing several initiatives and showing flexibility in upcoming filings to ensure insurers could focus on COVID-19. Individual companies have in turn shown the pay-off from all those years of disaster planning, noted Campbell, and implemented widespread business continuity measures that allowed insurers to continue working during this time.
Nonetheless, over the medium-term, the auto insurance segment could come into play in terms of its impact on insurers.
“The auto line of business in Canada has been historically – and in recent times – one of the most problematic. The idea that there is going to be a marked decline in the accident frequency and claims frequency is certainly extremely likely given the dramatic reduction in kilometres driven,” said Campbell, adding that we won’t see this effect come to fruition till Q2.
However, it’s also challenging for insurers to make commitments about medium-term reductions in premiums or large rebates when it’s unclear how long the lockdowns are going to last and considering that the results in auto were poor to begin with. Some insurers have, meanwhile, had rate increases, which have been going into effect amid the crisis.
“That timing is obviously undesirable from a consumer perspective, from a reputation management perspective and from a political perspective, so those are delicate balancing acts that certain companies are having to work their way through now,” said Campbell.
Over the longer term, the coronavirus has already had an impact on many commercial insureds, especially smaller companies, and less customers buying potentially less insurance down the road could be problematic for insurers. What’s good or bad for the Canadian economy is in turn similarly bad or good for the insurance industry, according to Campbell.
“But will it have particular impacts on certain companies over others? That’s the stuff you have time to plan for because that’s going to play itself out over the next 12, 24 or 36 months,” he noted. “By itself, that is unlikely to trigger a solvency event.”
Where there could be trouble brewing is if insurers see more claims coming out of the coronavirus than they had anticipated. Insurers exposed to private long-term care facilities, for example, could be in hot water.
“That’s an area where you could have materially larger losses than anyone had anticipated,” said Campbell. “That’s the primary area of focus for us at PACICC right now is trying to understand, are there companies that end up having more generous coverage for business interruption or have particularly large shares of lines of business that have real risk.”
