Balance tilts to profit in Canada's auto market.

After years of unprofitability, Canada's automobile insurance market looks like it turned the corner in 2004, leading consumer groups and provincial governments to call for continued rate cuts. But industry watchers and advocates caution that market trends and unfavorable regulatory changes could negatively impact the next few years.

The Insurance Bureau of Canada, a trade group representing insurers, said 2004 total net earnings for property/casualty insurers in Canada were C$4.2 billion (approximately $3.4 billion), with only 6 cents of every revenue dollar being profit. Start Griffin, IBC's president and chief executive officer, said while results were "healthy for the industry across the board," some auto insurers' results weren't as good in some provinces, and full results for 2004 in that line weren't yet known.

"Generally, it's certainly good news that the industry has returned to financial health," Griftin said.

It was a good year financially for industry leader ING Canada Inc. The No. 1 writer of auto in Canada, ING Canada's net income for 2004 more than tripled to C$624.2 million from C$150.5 million in 2003, the company said. ING Canada's combined ratio--losses and expenses as a percentage of premiums--improved to 86 in 2004, compared with 98.1 in 2003 and 101.2 in 2002.

Martin Beaulidu, senior vice president of personal lines for ING Canada, attributed the growth to two factors: reduced claims and market reforms. "What we have seen "after the reform actions, claims costs have started to come down after six or seven years," Beaulidu said. "And overall, our estimate is that claims frequency came down by 15%."

Several provinces have enacted reforms to cap pain-and-suffering damages, and others, such as Ontario, have taken measures to reduce growing "soft tissue" expenses--stemming from sprains, strains and whiplashes--by implementing treatment guidelines and standardizing treatments (Best's Review, October 2004). Beaulidu said such reforms "attacked the heart of the problem" insurers had been facing in Canada. Other reforms, he said, closed loopholes in the system.

Charles Huber, a senior financial analyst in the property/casualty division of A.M. Best Co., said 2004's "very good" results are because "premium rate increases from 2002-2003 have earned through" and claim frequency has decreased.

Because profits were driven in part by increased premiums and rates, Bruce Cran, president of the Consumer Association of Canada, said industry profits should result in direct premium relief for customers.

"I've got no problem with the insurance industry making a profit" Cran said. "I'd be concerned if they weren't. I am concerned with how these profits are obtained. People are frightened to put in auto claims because they double and triple the rates."

Griffin said premiums and rates have come down across Canada. For example, in Ontario, the country's most populous province, premiums have been reduced by about 12%, he said. And in Alberta, where premiums have been frozen, at least eight companies have filed for voluntary rate reductions of around 5%, Griffin said.

"We don't see any obvious reductions in premiums," Cran countered." In the field, we see no reductions"

Beaulidu said ING Canada has reduced its rates by 8% to 25% in various parts of the country, and he predicted further, industrywide rate reductions, thanks to the reforms passed. The industry, he said, is cautiously watching the trends in the market to prevent "jumping the gun"

"I don't think it should take a lot of time to see more benefits if these trends were to hold up" Beaulidu said."We're optimistic these reforms will hold up."

Others were more cautious about the market.

"In 2005, we're anticipating the results are going to be good, but not as good as 2004 because of the rate freezes on auto," Huber said. "We don't know what 2006 will look like, but it appears that results will deteriorate if underwriting discipline is not maintained and claim frequency increases again. It is a wait-and-see situation with regards to what long-term effect the regulatory changes will have on underwriting results."

Ontario and Alberta have instituted rate freezes that are to lift later this year. Rate rollbacks also have been ordered. But what most concerns Griffin and the IBC is Bill 34, introduced in the Alberta Legislature earlier this year. The bill clarifies the government's ability to control rates, Griffin said, but it also contains language intended to protect the government from liability for any loss or damages that insurers may suffer because of regulatory changes.

"It's a pretty draconian piece of legislation," Griffin said. "I suspect there will be some challenges from the industry on a number of grounds."

Top 5 Writers,
Canadian Auto, 2003

Rank is based on direct premiums
written.

(C$ Thousands)

ING Ins Co of Canada          $1,637,476
State Farm Mutual
Auto Ins Cab                  $1,040,090
$838,155          Wawanesa Mutual Ins Co
$790,204     Co-Operators General Ins Co
$675,868  Dominion of Canada General Ins

Source: A.M. Best Co. Statistical Study