By: Luke Jones, Published on April 14, 2017 10:47 AM, Last Update on April 14, 2017 07:51 AM
Over the last 20 years, the P&C industry in Canada has shrunk according to a new report from the Property and Casualty Insurance Compensation Corporation (PACICC). The report shows that over the past two decades, 161 different insurance providers have left the market.
However, 96 percent of the departures were voluntary. The 11th PACICC Why Insurers Fail research report was released at the company’s annual general meeting at Cambridge Suites Toronto Hotel on Thursday. Grant Kelly, chief economist and vice president of financial analysis and regulatory affairs for the group presented a synopsis of the report.
Titled Why Insurers Fail: Exit Strategies of P&C Insurers, the report shows that between 1996 and 2015, around 96%, or 155 of the 161 companies pulled out of the market of their own accord. In other words, these companies did not go out of business because of financial strains. Forty of the firms disappeared by merging with other companies.
Some others were closed by regulators. Kelly notes that the P&C market lost 25-30% of its companies during 20 years.
“If I look back through the entire history of the insurance industry, there are literally hundreds of companies that no longer exist,” Kelly said during his presentation. “The lack of insolvencies over this period is evidence of a well-functioning insurance marketplace. Insurance insolvencies are very rare, in terms of exiting, it happens all the time.”
Of the 155 voluntary departures that left the market, 25% merged and 35% closed and stopped offering products in Canada. 32% transferred their books to other insurers.
Individually, “insurers that exited via merger or exited voluntarily reported stronger underwriting results than firms that exited involuntarily,” the report said. “Insurers that exited by merging with another insurer, or those that left by other voluntary means, experienced better loss development than insurers that were forced to close by regulators.”
Kelly added that “the companies that merged appeared to be better reserved, so there was a reason they were attractive merger candidates,” By contrast, for the companies that voluntarily left or regulators closed, “our research shows that they are probably right to make those decisions – the reserves were inadequate,” he said.
“A core finding of all the other Why Insurers Fail papers, the number one reason why companies failed, is inadequate underwriting reserve,” Kelly said during his presentation, noting that of the involuntarily closed insurers, “their loss ratio was, in a lot of cases, twice the industry average at the end. Merger candidates were really close to the industry average.”