09/25/2009

We're watching your budget!

A basic explanation of what is currently taking place in the Canadian Insurance Industry.

Main Contributing Factors Influencing the Current Insurance Climate

Claims Costs

·         In recent years the Canadian general insurance industry (non-life) has paid out billions more in claims and associated expenses, than it collected in premiums.

·         After many years of relative stability, claims costs have increased dramatically

·         Increasing major catastrophes especially concerning water related losses and sewer back-ups often caused by, or made worse by, aging drainage systems and infrastructure. 

Economic Factors

·         Insurance Companies generally make their profit with the help of their investment income.  This is difficult in today’s poor performing stock market and low interest rate environment, which has seen a declining return on equity for insurers, typically in the 2-3% range.  Especially in a world economy, capital generally flows to where it can get the best return and if not insurance, it will go elsewhere.  Higher returns help offset the premiums necessary to pay claims.

Why are Claims Costs Increasing?

·         The main principal of insurance is that the premiums of the many pay for the losses of the few.  This allows a typical consumer to protect their assets and safeguard against the possibility of financial ruin (lawsuit, fire, crime), for a relatively low cost.  Premiums are collected in advance of claims paid and are significant pools of money, which is then managed, and invested by insurers and used to pay administrative expenses, claims, and hopefully a reasonable profit to the shareholders.  When the entire industry loses money all consumers contribute to these shortfalls through increased insurance premiums.  These premiums are spread over millions of different policies and apportioned based on the loss potential of each type of risk and policy and will vary depending on claims history, driving record, fire protection, etc.

·         Ontario has one of the best and most generous automobile insurance plans in the world and the costs associated with this have been increasing considerably. 

·         The costs of injury and medical rehab claims especially have increased tremendously in proportion to the increasing costs of medical care in general

·         Insurance Fraud now amounts to billions per year in Canada or 10% of total claims payments

·         Legal and court fees have increased substantially

·         Claims inflation has increased 5% annually on average while the Consumer Price Index has increased only 2.7%

·         Most consumers have been receiving more comprehensive insurance coverage while paying less

·         With over 100 insurance companies in Canada, and an excess of capital, the market has been highly competitive and cyclical.  As a result of the above, premiums have been driven well below even break-even levels.

Why does the Economy Impact the Cost of Insurance?

·         Like every business, the Insurance Industry needs to produce a reasonable return on investment to maintain viable operations in Canada.

·         Investment returns often subsidize premium levels.  When investment returns are poor, premiums have to increase to cover the cost of claims and expenses.

·         The Government has no further interest in subsidizing insurance premiums or getting into the business of insurance

·         Insurers have an obligation to policyholders as well as shareholders - policyholders deserve value for their premium dollar while shareholders demand a reasonable return on investment.

·         The decline in the stock and investment market that has occurred over the past year will impact every insurance buyer worldwide.

What can consumers expect to see next?

·         Insurance premiums increasing during each of the next few years, even on claims-free policies.

·         Insurers becoming increasingly selective on acceptance of new and renewal business.

·         Insurers may not renew policies that pose a higher risk or that do not meet stricter qualifications or with inadequate loss control practices

·         Brokers may move policies to larger, more financially stable and fiscally responsible insurers.

·         Reduced or restricted coverage

·         Increased deductibles

How Insurance Companies are responding

·         Re-evaluating the type and size of risks to be insured

·         Tightening policy wordings in an effort to limit exposure to risk (examples might include lower water damage limits).

·         Increase pricing to offset increased reinsurance and other costs

How Guthrie Insurance Brokers can help -

Add value for our clients by helping you understand these premium increases and changes to your coverage.

Help you mitigate future premiums by providing ongoing claims management and counseling

Encourage appropriate insurance that has the right balance of risk management and coverage through the effective use of deductibles, self-insurance, loss control, and limits.

Align ourselves with only the most financially solid insurers that are committed to you as a consumer

Our goal is your long-term financial security!

We certainly understand that higher premiums are never welcome.  Our sincere hope in providing this information is that through knowledge and understanding it will help prepare your family and business for your future insurance needs and budget.

Thank you for you patience & understanding during these difficult times -

Ryan Guthrie, President - & all of us at Guthrie Insurance Brokers Ltd.

Back to headlines