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Perspective - December 2006Perspective, IBC's quarterly analysis of economic trends in Canada's P&C insurance industry, is now available on IBC's members-only website, and attached is a copy for your convenience.
Ready when we are needed
The potential for significant and damaging disasters remains a clear and present danger to Canada in 2007. Fortunately, there were fewer catastrophic losses across North America in 2006 than the year before -- 2005 was one of the most expensive years for catastrophic losses in Canadian insurance history with insured losses approaching $3 billion. The potential for significant and damaging disasters remains a clear and present danger to Canada in 2007. For P&C insurers it is essential to have strong earnings, capital growth, and reinsurance protection in place in order to be prepared to respond.
The law of unintended consequences
Governments in many U.S. jurisdictions have an unsuccessful history of intervening in insurance markets to protect consumers. Examples of such regulatory failure can be found in the states of South Carolina , Massachusetts and New Jersey . Independent academic research suggests that regulators can best protect consumers by allowing market forces act to achieve affordable and available auto insurance.
The invisible hand
A stable, healthy and competitive insurance industry is vital to the long-term viability of the economy. Despite its critical role in the economy, P&C insurance is the most heavily taxed consumer product in Canada (roughly three times that of other financial services). Worse yet, many of these taxes overlap and are hidden from consumers. Perhaps some of the public inquiries into insurance earnings would be better directed to the much more significant impact of taxes on the price of insurance.
Cost of capital and P&C insurance
Over the past two years, rate regulators in Alberta , Newfoundland & Labrador and New Brunswick have held hearings on the appropriate profit provision for auto insurers. These discussions have sought to determine what constitutes a ˇ°fair rate of returnˇ± for the insurance industry. Insurance has several lines of business and is delivered in a competitive environment, so there can not be "one" business strategy, nor "one" unique risk involved in investing in this market. Rather, there are many business strategies, involving many varied degrees of risk. As a result, there is no "one" cost of capital and no "one" return on equity. Each firm takes its unique combination of management expertise, marketing, sales, investment, underwriting and claims strategies to capital markets and looks for their willingness to take a chance on the enterprise. In exchange, they offer a return commensurate with the risks involved relative to other potential investments.
For current information about this and other issues of importance to the P&C insurance industry, please visit Infosource, IBC's members-only website at https://infosource.ibc.ca. The document is available under the following path: https://infosource.ibc.ca/IBC/Home/Publications/Perspective.
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