Economic uncertainty is abound in the P&C industry, and that means companies should take extra care to properly price their exposures, experts said during a Canadian Underwriter webinar last Wednesday.
And those on the ground are feeling the precariousness as much as industry experts, according to poll results from 2024 Economic Outlook: What the future holds for the P&C insurance industry.
When asked whether the Bank of Canada look will lower interest rates in 2024, webinar attendees displayed mixed reactions. About 46% of 222 respondents said yes, 43% said no, and 11% were unsure.
“I think the uncertainty that was symbolized in the results from the audience probably are matched by the uncertainty we’re all feeling individually about the situation today,” said Alister Campbell, president & CEO, Property and Casualty Insurance Compensation Corporation (PACICC).
The Bank of Canada announced interest rates at 5% in October as a means to control inflation. Canada’s inflation rate has gradually decreased to 3.1% in October after peaking at 8.1% in June 2022.
“Since the Bank of Canada created its inflation targeting regime in 1991, almost without exception for three decades, inflation hovered around that 2% target, plus or minus 1%,” explained Jordan Brennan chief economist and vice president of policy development at the Insurance Bureau of Canada.
“Two per cent is the [inflation] target but the Bank of Canada specifies [that] 1% to 3% is an acceptable band. So it might be okay; we might just have to live with the fact that it takes another year, two years to slowly creep our way down into the upper end of that band.”
But panellists made it clear it’s difficult to make predictions about interest rates with any degree of certainty.
“I’m certainly sitting on the fence on this one. Will they come down? Yes. But will it be 2024? Is it going to eke into 2025?… For next year, I don’t feel confident enough to call it,” said Colette Taylor, chief operating officer, Sovereign Insurance.
That makes it all the more pertinent that carriers stay diligent about properly pricing their risk.
“I think the right strategy is to assume that you will have continued uncertainty, and focus on what you’re good at, and stick to your knitting,” Campbell said. “I would say as a general rule, our industry’s pretty good at that.
“There will be folks who are tempted to look at these attractive yields and start thinking they should be cashflow underwriting. And what they will forget is that the cost of capital for them is going up when interest rates go up, because everything is priced off the risk-free rate,” he said.
“Over time, responsible treatment of your capital by properly pricing your exposure — regardless of what’s happening in the quarter with the Bank of Canada’s interest rate policy — is 100% the right strategy, even though it’s hard to execute with all the distractions.”
The good news is companies have reason to be optimistic about the current economic environment, so long as they use it to improve their analytics, and in turn, client policies.
“I absolutely believe there is going to be rate relief for clients next year through their renewal, when they’re the type of client that has really dedicated themselves to understanding their risks and mitigating their exposures,” said Taylor.
“Coupled with that rate relief, I think we continue to get more refined in our underwriting to be able to identify where there are opportunities, [by] leveraging the insights, and the analytics that we, as an industry, have spent a lot of money investing in to catch up for the amount of time that we didn’t invest in them.”
Feature image by iStock.com/ronniechua