Banks often struggle with surging loan losses during economic downturns, but P&C insurers do not face the same threats
. A recession doesn’t, for instance, spark more flooding that sends property claims soaring. These insurance companies are designed – and regulated – to be boring.
They have also been lucky. Claims have been rather benign over the past few years, both for their personal-auto businesses and for catastrophic losses stemming from severe weather events. The calm has been particularly surprising for autos, because Intact recently disclosed that its data suggests car usage is back to pre-COVID-19 levels. And yet accident frequency is still subdued.
Just like economic cycles, the insurance market ebbs and flows. In a soft market, insurers drop their prices and increase their risk tolerance in hopes of gaining market share. Some of the strength comes from higher premiums. Even though raising prices is tough to do for personal auto insurance because of provincial regulations, many of the COVID-19 relief measures insurers instituted are ending, and the impact on revenue is the same as a price hike. But the real structural tailwind is in an investment in data and sophisticated risk models, which has helped both insurers determine which clients are worthy of underwriting.
Intact, based in Toronto, is Canada’s largest P&C insurer. Lately it has been growing its business abroad, with multiple acquisitions in the United States, as well as a, based in Britain. The growth abroad has impressed investors, because Intact has successfully integrated its takeover targets and increased profits in the process. Intact even recently disclosed that it expects to generate better cost savings from the RSA takeover than it originally estimated.
Unlike Intact, whose shares have soared 208 per cent over the past decade because of strong operating performance, Definity has been more of a turnaround story over the past five years. In 2018, its combined ratio was 111.8 per cent, meaning it was paying out more in claims than it was bringing in through premiums. By the end of 2021, the ratio had fallen to 93.
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