In a recent report by the Property and Casualty Insurance Compensation Corporation (PACICC), concerns were raised about the stability of the auto insurance sector in Canada. This concern stems from the first quarter results of 2024, which revealed troubling statistics about the Net Insurance Service Ratio (NISR) across various provinces and territories.
The NISR, which is a new measurement introduced under the IFRS 17 accounting standard, is considered a more comprehensive metric compared to its predecessor under IFRS 4. The NISR not only accounts for loss ratios but also includes acquisition costs such as commissions and reinsurance premiums, as well as the burden of onerous contracts. Typically, PACICC suggests a sustainable NISR should lie between 75% to 85%.
However, the report highlighted that 12 out of Canada’s 13 provinces and territories have recorded a NISR exceeding this range in the auto insurance sector, indicating a lack of profitability. Specifically, Nunavut was the only region where auto insurers are reportedly increasing their capital base. Contrastingly, regions like Alberta, Prince Edward Island, Manitoba, Saskatchewan, and British Columbia observed NISR values exceeding 100%.
Due to such high ratios, the sustainability of these markets is questionable, potentially leading to market instability. Consequently, insurers might need to increase premiums or reduce the coverage they offer, depending on regulatory permissions. In fact, companies like Sonnet Insurance and Aviva Canada have already started phasing out certain auto insurance operations in Alberta due to these challenges.
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Moreover, Manitoba Public Insurance has requested a rate increase due to rising auto repair costs and significant damage from catastrophic events, despite a recent reduction in premium rates.
While the auto insurance sector faces instability, the personal property insurance sector, which constitutes the second-largest line for PACICC members, appears profitable in most Canadian regions. Yet, areas like Newfoundland and Labrador and New Brunswick still reported NISRs that suggest potential unprofitability.
Given the increasing frequency of severe catastrophic events, it remains to be seen whether the rate adjustments implemented are sufficient to maintain long-term sustainability in these sectors.
For more detailed insights into the state of Canada’s insurance market as of early 2024, refer to the full PACICC report authored by Grant Kelly and Zhe (Judy) Peng.
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Words by: Craig Clowes
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