Part I: Financial Results and Hard Market Conditions

The Canadian insurance industry entered the third quarter of 2021 in a very strong position, sporting record breaking profitability in the first half of the year following solid profitability in 2020. This despite COVID-related auto rebates and a sluggish economy. The hard market which began in 2018 shows no sign of stopping, bringing rate adequacy to most players after many years of inadequate returns driven by fierce competition.

During the first half of 2021, 93.4% of the Canadian industry, when measured on direct premiums written, exhibited a combined ratio of less than 95%. More than half had combined ratios less than 85% and only 6.6% of the market had combined ratios over 95%. Compare this result to 2020 and 2019.

True, we don’t expect this outstanding result to hold for the balance of the year. Nonetheless, barring very large CATs, 2021 will likely be better for the industry than 2020 which in itself was a solid year.

There are several forces that are contributing to the continued hard market as the industry executives and shareholders are loath to go back to lacklustre results. Here are some of the main reasons other than intestinal fortitude:

• The reinsurance market battered by COVID and nasty catastrophes in Europe and the US is entering the 2022 renewal season with a firm stance. The traditional reinsurers (Swiss Re’s, Munich Re’s of the world) are pretty full up on exposure. The escape valve for additional exposure will come from the capital markets in the form of Insurance Linked Securities known as ILS (Cat Bonds etc.). The pension plans and other providers of capital to ILS are in no rush to underprice the risks. So, we can expect a hard reinsurance market as we enter 2022.
• Interest rates remain low so carriers must continue to earn their keep on the underwriting side.
• Carriers remain wary and are positioning themselves to face the new world of CATs driven, in part, by climate change but also by choices made by society of where and how to re/build. Water, Fire, Hail and Wind. Need we say more? The cost of CATs in Canada is routinely cracking $2 billion a year and much larger mega CATs are always possible.
• Inflationary worries. The amount of government spending during COVID in Canada and other western countries may trigger a resurgence of inflation of the CPI variety. Insurance premiums go along for the ride in an attempt to avoid erosion in value. Claims can experience two types of inflation (which can be uncorrelated), the CPI variety as well as the social variety — as courts award higher and higher payouts. Both types of inflation are keeping CEOs awake despite the stellar returns.
• There is an expectation of ‘return to mean’ in terms of auto claims when Canada emerges in earnest from COVID. Remember those days with very high physical damage losses due to the high-tech nature of today’s cars? In addition, as government COVID supports are withdrawn, there is fear that auto AB and BI fraud will come back strong.
• Consolidation drives discipline. It is expected that Intact will keep its eye on the ball as it integrates RSA and will not want its outperformance to slip. Further, as Economical’s IPO as Definity takes place, it will retain laser focus on discipline.

Part II: CAT Country

On August 9, 2021, the U.N.’s Intergovernmental Panel on Climate Change (IPCC) released its sixth and most ominous report to date heralding an alarming future for the planet. Here are a few snippets:

• It is unequivocal that human influence has warmed the atmosphere, ocean and land. Widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have occurred.
• The scale of recent changes across the climate system as a whole and the present state of many aspects of the climate system are unprecedented over many centuries to many thousands of years.
• Global surface temperature will continue to increase until at least the mid-century under all emissions scenarios considered. Global warming of 1.5°C and 2°C will be exceeded during the 21st century unless deep reductions in carbon dioxide (CO2) and other greenhouse gas emissions occur in the coming decades
• Many changes in the climate system become larger in direct relation to increasing global warming. They include increases in the frequency and intensity of hot extremes, marine heatwaves, and heavy precipitation, agricultural and ecological droughts in some regions, and proportion of intense tropical cyclones, as well as reductions in Arctic sea ice, snow cover and permafrost.
• Please visit https://www.ipcc.ch/ for the full sobering report.

Our industry is on the front line of climate change. While not every CAT can directly be attributed to global warming, the frequency and severity of events in Canada and around the world is incontrovertible. The first two quarters of the year were light on CATs here in Canada, but they ramped up starting in July. The devasting fires in western Canada took out Lytton and have done significant harm elsewhere, including the White Rock Lake Wildfire which has been burning since August 4. Other CATs included a large CAT featuring hail and flooding in Calgary on July 2, a powerful tornado in Barrie, Ontario on July 15, severe storms in the prairies (AB, SK and MB) from July 22-23 and severe storms in AB and SK August 31-Sept 1. Other than the Barrie tornado, all of the action so far and most of the dollar losses were in western Canada. According to CatIQ, we are on track to surpass $1 billion in CDN losses very soon (perhaps even before this article is published) with about 80% of that occurring between July 1 and September 10.

Personal lines writers, reinsurers and, to some extent, commercial writers are repositioning themselves for the new reality. Auto is already diminishing as a line of business as property comes to the fore.

Another line with potential to wreak systemic havoc is cyber. While still a relatively small slice of the industry pie, it is growing and remains volatile and unprofitable.

Part III: Technology and Distribution

The pandemic accelerated the race for tech adoption in the industry in carrier, distribution and claims adjuster arenas. Tech adoption is now table stakes, both internally devised and developed and in partnership with InsurTechs. The tech revolution is driving consolidation in all areas of the industry food chain. Scale is the name of the game. No area of the industry that can be automated is being overlooked and is being picked over by InsurTechs.

There are three potential external tech threats to the industry:

1. Full stack InsurTech Unicorns (startups that provide both distribution and underwriting and that have values over $1 billion USD) such as Lemonade, Hippo and Metromile. All are US based and have yet to point their cursors north. They are currently rapidly chewing through their capital in the quest for market share and scale. The rate of capital burning is such that it is doubtful whether these players would want to attack the Canadian market any time soon.
2. The mega techs giants such as Facebook, Google, Amazon or Apple. They have the data, the IOT, they have the capital and they have the tech. They have dabbled but they have still not turned their formidable firepower at the industry. Perhaps because of relatively low returns on offer. But when they do decide to engage, there’s not much that can stop them.
3. Embedded insurance such as insurance offered with car leases or car subscription policies. As those that attended www.insurtechnorth.com back in April saw, GM’s OnStar is already working on such a product.

Incumbents can’t afford to let down their guard.

In conclusion, the industry is in transition and will be quite different than the one we knew pre-pandemic in 2019.