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Industry Updates
Headwinds Remain

AM Best webinar: Canada’s property/casualty sector fares better than the life/health business in the COVID era.
  • David Pilla
  • October 2020
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Canada's property/casualty insurance market remains stable in the face of the COVID-19 pandemic while the life and annuity market is seeing existing problems made worse by the virus, according to AM Best analysts.

With the onslaught of COVID-19, gross domestic product for Canada contracted markedly, said Ann Modica, associate director, economic and industry research, AM Best, in an AM Best webinar reviewing the impact the virus on the Canadian insurance market and economy.

She said gross domestic product for the first and second quarters had been “dismal,” with the second-quarter contraction of 38.7% the worst in Canada's history.

Ann Modica

Ann Modica

Modica noted a “massive decline” in domestic demand and there has been softness in the labor market in Canada, mitigated somewhat by government help. However, she said the housing market is seeing signs of improvement in the third quarter, among other positive signs for the economy, as the country continues to open following lockdown measures that were undertaken in April.

She said COVID-19's impact on the Canadian economy makes short-term predictions all but impossible. AM Best revised its outlook to negative for Canada's life insurance market while maintaining a stable outlook for the country's P/C segment.

Canada's property/casualty insurance industry thus far has fared better than its life counterparts amid the volatile economic and market dynamics created by the COVID-19 pandemic, according to a Best's Market Segment Report, COVID-19 Taking Its Toll on Canada's Economy and Insurance Industry.

Following a relatively mild loss experience in 2019, in 2020 COVID-19 “reared its ugly head and impacted us all,” said Raymond Thomson, director, composite ratings, AM Best, in the webinar. “Challenges will remain” if the market is to maintain premium growth. Another issue on the horizon involves the legal questions related to coverage disputes in the business interruption market, he said.

Thomson said all Canadian property/casualty insurers were targeted in August by a class-action lawsuit over business interruption losses. He said more headwinds can be expected in automobile and weather-related lines as well.

Frequency in auto losses is “way down” this year from fewer miles being driven, said Thomson. Noting “there has been some consideration by insurers to return premiums,” he said while auto accident frequency is down, it appears that severity has been rising even as there are fewer drivers, more reckless driving may be occurring on less-congested roads.

The COVID-19 pandemic exacerbated other headwinds particularly low interest rates, in the first half of this year, Michael Adams, associate director, life and annuity, AM Best, said in the webinar.

AM Best revised its Canadian life insurance outlook to negative primarily due to the significant contraction in the global economy, an increased likelihood of a lower for longer interest rate environment and potential for increased mortality and morbidity claims, he said.

The life market had significant sales declines in the first half due to COVID-19, with some insurers performing better than others, Adams said. The group life segment will see some negative impact due to higher unemployment.

Another headwind is cyber liability, where Canadian life insurers had been incurring costs to invest in system upgrades, he said.

“In April, AM Best revised its outlook on Canada's life insurance industry to negative, owing to the significant disruption to the financial markets caused by the COVID-19 outbreak and the persistently low interest rate environment,” AM Best said in its report. “Although most of Canada's [life and annuity] insurers maintain strong balance sheets and will likely be able to absorb regulatory capital changes resulting from volatility in the global financial markets, operating performance could be negatively affected.”

The change in outlook “anticipates headwinds to the operating performance of Canada's insurers, which, depending on the severity and length of the pandemic, could eventually lead to negative impacts on insurers' balance sheets,” the report said.

The Canadian life insurance market has been stable with good AM Best ratings over the past few years, Adams said.

Life/health growth has been flat in 2019 in Canada's mature market, said Adams. Investment income had been virtually flat over the past year due to low interest rates, he said.

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