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Insurer returns not “obscene”By JAMES DAW, The Toronto Star, February 22, 2005
Auto insurers are easy to hate and anyone with a grievance or axe to grind is likely to view their profits like a poke in the eye.
It's hard to love a business that has the police to check on your purchases and to randomly ticket you for offences that could drive up the cost of your coverage.
So it's not surprising there was resentment and anger over Friday's announcement that property insurers earned a profit of about $4.2 billion last year.
But some reaction to the industry's record return on equity of 20.6 percent betrayed a lack of understanding and opportunism on the part of critics who should know better.
Politicians and consumer advocates were quick to call for lower premiums, while those who speak for chiropractors, medical assessors, lawyers and accident victims called for a bigger share of the dollars available.
Bruce Cran of the Consumers' Association of Canada took his rhetoric to new heights when he called the profits "obscene." He did not return a call from a reporter who asked him to define obscene.
The same criticism would presumably apply to the likes of the Bank of Nova Scotia, Dundee Corp., Home Capital Group, Great-West Lifeco, CI Fund Management Inc. and the Toronto Stock Exchange (TSX Group Inc.). All have earned more than a 20 per cent return on equity in a recent period.
But, while there are plenty of things for which property insurers deserve criticism, outlandish profitability is hardly one of them. In fact, private insurers have had only two exceptional years in the past seven.
Last year was the first time in five years that insurers, as a group, made any profit at all from motorists - not a healthy situation for the companies or the customers they serve.
It will be another few weeks before the Insurance Bureau of Canada is able to provide a breakdown of the industry's $4.2 billion profit. Until then, only rough estimates are available.
But George Cooke, president of Dominion of Canada General Insurance Co., and his chief financial officer, Doug Hogan, say that virtually all of the $2.7 billion that insurers earned nationally in 2003 came from home and business coverage. Little if any profit came from auto insurance, and many insurers recorded losses.
A majority of the $1.5 billion improvement in total profit in 2004 likely came from auto insurance, said Hogan and Cooke. The turnaround was helped by the earlier spike in premium rates, a decline in the frequency of claims and the action taken by provincial governments to control insurers' cost of claims.
Auto insurance is the only line of business that is subject to government controls on premiums and costs, and in many ways insurers are victims of government action, or inaction, along with decisions made by courts.
If Hogan and Cooke are right in their estimates, then only a quarter to a third of the industry's $4.2 billion profit came from vehicle owners, yet they account for half of the industry's premiums and costs.
Some insurers are even more reliant on vehicle owners for their revenues. So they would have less potential to offset the low returns from their home and business lines.
The bureau has calculated that, over the past five years, only about 6 cents of total premium dollars from all lines of business fell to the industry's bottom-line profit.
Compare 6 cents with the 16 cents removed from policyholders to pay taxes and you will see there's more potential for price relief from Ottawa and the provinces than from shareholders of the insurers.
Profits for 2005 may be high enough to lift insurers' average profit over an eight-year period to the historical average of 10.1 per cent. But industry profit is unlikely to be as high as in 2004.
Companies have been cutting all premiums. Dominion has cut its average auto premium by 15 per cent to date, with the bulk of impact on its revenues to occur in 2005, said Hogan.
These reductions will only go part way to offset the large price increases taken in 2001, 2002 and 2003. But, as Dominion points out on its website, the price increases must be viewed in context.
The average auto premium Dominion charged in 2004 was $1,523. That was up 38 per cent from the $1,107 average premium in 1996.
That amounted to an average annual increase of 4.1 per cent a year. But
Dominion's average premium fell by 8 per cent between 1996 and 1999. So the average premium paid over a nine-year period was $1,204.
According to Dominion that equated to an average annual price inflation rate of 2.1 per cent. While that was higher than the 1.7 per cent average increase for all consumer prices, it's not far out of line.
Cooke says that if governments were not to meddle, market forces would bring prices down further and in a manner that would be fairer to those hit hardest by price increases.
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