Despite the strong price adjustments seen in the past year, the outlook on the Canadian property and casualty insurance sector remains negative, according to a report from Standard & Poor’s.

In Industry Report Card: Canadian Property & Casusalty Insurance it says “Intense competition, unrelenting claims costs, and poor investment returns continue to be factors that erode away profitability and capital”. The report was released on May 23.

The report notes that earnings fell by 48% in 2002, from an already record low in 2001. The earnings drop occurred evan as the industry combined ratio improved to 105.8% in 2002 from 110.4% in 2001 and underwriting losses improved by $801 million.

S&P says that return on equity also was at an all-time low for the industry, dropping to 1.6% in 2002 from 3.1% in 2001.

In 2002 and the first part of 2003, about 40% of the P&C companies followed by Standard & Poor’s were downgraded. “The prospects for the sector remain bleak, given slightly more than 85% of the interactive ratings on this sector have a negative outlook or are on CreditWatch with negative implications.”

S&P says that the Canadian P&C industry remains very fragmented and intensely competitive due to the large number of players in the marketplace. “Intense competition has ultimately led to thinner margins, and with no one dominant player, there is no obvious price leader in the Canadian marketplace,” it says.

One of the most troubled spots in the industry remains the retail auto insurance market. “The upward spiral in automobile claims has not only led to a decline in profitability, but also to multimillion-dollar reserve-strengthening adjustments,” S&P says.

S&P notes that insurers usually subsidize the cost of insurance for consumers with gains from investments, but it says that poor investment returns have curtailed this practice.”

Because of this, S&P concludes the outlook for the industry is grim. “Five years of poor results have left the industry vulnerable. Although industry prices have increased, P&C companies still have not seen a combined ratio less than 100% in more than 10 years and have not earned profits from underwriting in more than 20 years, as premiums collected no longer cover claims and expenses.”

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