Absent high reserve releases in the Canadian property & casualty (P&C) industry in 2016, challenging market conditions driven by a record volume of catastrophe losses would have resulted in an industry combined ratio of almost 109%, according to MSA.
In 2016 the Canadian P&C sector recorded a combined ratio of 99%, as mild weather in the final quarter of the year combined with strong reserve releases to ensure the industry remained profitable in the face of a very testing 12 months.
Catastrophe losses in Canada in 2016 spiked to a record $5.3 billion, driven largely by the huge Fort McMurray, Alberta wildfire event, and some other notable loss events throughout the year.
Catastrophe events in the region combined with the continuation of dangerously low interest rates, and also the deterioration of auto results in a number of Canadian territories, resulted in the Canadian P&C industry’s net income falling to $2.4 billion in 2016, compared with $5.2 billion a year earlier.
Furthermore, the industry’s return on equity (ROE) also declined in 2016 to 4.9%, compared with 11.6% in the previous year. While investment returns fell to roughly $2.9 billion in 2016, from the approximately $3.2 billion recorded in 2015, and underwriting income alone totalled just $484 million last year, compared with roughly $2.5 billion in 2015.
Overall, underwriting expenses also increased in 2016 when compared with the previous year, to roughly $47 billion, explains MSA in a recent report.
Reserves across the global P&C industry are widely believed to be dwindling, as insurers and reinsurers continue to release strong levels of reserves to bolster weak underwriting results which, owing to low investment yields has become the main driver of profitability for players in Canada and elsewhere in the P&C world.
With reserves running thin re/insurers will be less able to call on them to boost returns in the coming quarters and should another catastrophe event the size of the Fort McMurray wildfire, or even smaller for that matter, take place in 2017, the Canadian P&C industry could find itself in unprofitable territory. This is of course absent a significant turn in pricing in the sector or substantial rise in interest rates, which both seem very unlikely in the current marketplace.