Disciplined underwriting is the anchor that the P&C industry needs right now.
The insurance industry is currently experiencing some pain. Investment returns have been following a general downtrend over the last two decades, from a high of 10.4% in 1997, down to 7.3% in 1999 and a dismal 2% in 2018.
As a major stakeholder and investor in the national economy, return on investment is closely correlated with the yields on Government of Canada bonds, which have fallen for the last two decades. Nearly 69% of the P&C industry’s invested assets are placed in bonds. Global economic volatility, including political uncertainty and trade disputes, has also had a long-lasting impact on the Canadian economy.
Our industry in Canada is a slow-growth one. Compound this with low interest rates, an elongated soft pricing cycle, increasing claims inflation and negative trends on large losses, and we face an unprecedented number of headwinds. This has been compounded since 2016 with significant losses stemming from changing weather patterns.
These factors are straining returns and ultimately driving the need for insurers to focus on profit over growth. A large part of the focus has been cost efficiencies. As an industry, however, we have not evidenced a strong track record of action on underwriting performance to stem the trend of falling investment returns. Under current conditions, which we have to regard as the “new normal,” a clear focus on insurance fundamentals to deliver returns is essential. Underwriting profits will have to become stronger to offset ongoing decline in investments.
Given the pressures we have been facing across many areas of P&C, the need for clear underwriting strategy, and the discipline required to manage policies and products that are unprofitable, are minimum requirements. We are aided by the advances in data and analytics, but the challenge is getting those integrated into decision-making.
The big adjustments we are seeing in the market makes life harder for our broker partners who have the challenging task of explaining this to their customer base. The role of a broker is now more important than ever. Brokers who work closely with their markets to understand the performance of customers in their portfolio will be well-informed about what lies ahead. Understanding performance and risk quality now can enable them to work with customers to understand how they can effectively manage their risk and insurance program.
“Lower for longer” is a challenge for all stakeholders in the insurance market; stronger underwriting focus will be a key determinant in successfully navigating this.
Martin Thompson, President, CEO, RSA Canada
This article originally appeared in Canadian Underwriter magazine.