Market & Cycle How Long Can We Stay Profitable? A Canadian Perspective Presented by: Kevin A. Lee FCAS, FCIA Executive Vice-President IAO Actuarial Consulting

Market & Cycle How Long Can We Stay

Profitable?A Canadian Perspective

Presented by:Kevin A. Lee FCAS, FCIAExecutive Vice-President

IAO Actuarial Consulting Services Inc.


Table of Contents

• P&C Industry ROE

• Market Composition

• Regional / Line of Business Results

• Auto Some More

• What is to Blame for the Cycle?

• Can the Cycle be avoided?

• What to Expect


P&C Industry - ROE

Annually After-Tax Return on Equity

-12%

-7%

-2%

3%

8%

13%

18%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

Insurers

Reinsurers


P&C Industry - ROE

Annually After-Tax Return on Equity

-10%

-5%

0%

5%

10%

15%

20%

25%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

Top 5 Large

Medium Small


Calendar Year After-Tax ROE

-5%

0%

5%

10%

15%

20%

25%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

Insurers Reinsurers Top 5

Large Medium Small

P&C Industry - ROE


ROE Comments• Cycle is evident• Most recent is very short and severe – trough

to peak in 3 years• 9/11 what was the impact?• Most drastic in history?• Insurers better than reinsurers in latest peak• Small had less extremes then largest• Raises interesting questions – more later


Market Composition Insurers (2007)

49%

17%

16%

15%

3%

Auto

Personal Property

Commercial Property

Commercial Liability

All Other


Market Composition Top 5 Insurers (2007)

60%20%

12%

8% 0%

Auto

Personal Property

Commercial Property


All Other


Market Composition Large Insurers (2007)

52%

16%

17%

15%0%

Auto

Personal Property

Commercial Property


All Other


Market Composition Medium Insurers (2007)

45%

22%

12%

21%

0%

Auto

Personal Property

Commercial Property


All Other


Market Composition Small Insurers (2007)

33%

20%

20%

21%

6%

Auto

Personal Property

Commercial Property


All Other


Market Composition Auto by Region (2007)

57%

18%0%3%

3%2%

17%

0%

Ontario

Alberta

NWT/Yukon

New Brunswick

Nova Scotia

Newfoundland

PEI

Quebec

Source: IICC


Market Composition Comments

• Huge auto share

• As auto goes, so goes the industry

• More rate regulation in auto makes cycle more severe – a dam that bursts

• Large companies have larger share of auto – helps explain some of the earlier ROE slides


Automobile

Countrywide Loss Ratios

50%

55%

60%

65%

70%

75%

80%

85%

90%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

P & C Industry

Top 5

Large

Medium

Small


Automobile Loss Ratio

Regional Loss Ratios

40%

50%

60%

70%

80%

90%

100%

110%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

OntarioAlbertaQuebecAtlanticNWT/Yukon


Automobile ROE

Regional ROE

-10%

0%

10%

20%

30%

40%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

Ontario Alberta

Quebec AtlanticNWT/Yukon


Province 2007 OverallLoss Loss Ratio Trend

• Newfoundland 63% 6.0%

• Nova Scotia 51% -0.5%

• New Brunswick 51% -2.8%

• Prince Edward Island 53% -0.9%

• Quebec 61% 5.4%

• Alberta 63% 8.6%

• Ontario 78% 9.0%

Automobile Trends


Personal PropertyCountrywide Loss Ratios

40%

50%

60%

70%

80%

90%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

P & C Industry

Top 5

Large

Medium

Small


Personal Property Loss Ratio


40%

50%

60%

70%

80%

90%

100%

110%

120%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

Ontario AlbertaQuebec AtlanticNWT/Yukon


Personal Property ROE

Regional ROE

-35%

-25%

-15%

-5%

5%

15%

25%

35%

45%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

Ontario Alberta

Quebec Atlantic

NWT/Yukon


Commercial Property


30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

P & C Industry

Top 5

Large

Medium

Small


Commercial Property Loss Ratio


0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007



Commercial Property ROE

Regional ROE

-80%-70%-60%-50%-40%-30%-20%-10%

0%10%20%30%40%50%60%70%80%90%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

Ontario Alberta

Quebec Atlantic

NWT/Yukon




50%

60%

70%

80%

90%

100%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

P & C IndustryTop 5LargeMediumSmall


Commercial Liability Loss Ratio


0%

20%

40%

60%

80%

100%

120%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007



Commercial Liability ROE

Regional ROE

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007

Ontario Alberta

Quebec Atlantic

NWT/Yukon


Regional / Line of Business Comments

• Wild ride in Atlantic Canada – always ignored

• Prepare for one in Alberta – auto minor injury regulation

• Property relatively stable

• Auto is the culprit


Auto Some More• Joe Average hates auto insurance• Auto insurance in Canada is highly politicized • Rate regulators put constant downward

pressure on rates• Companies eventually respond• Public outcry• Changes to the auto product • If changes are initially successful, calm

ensues,• But . . . the cycle eventually repeats


What is to Blame?• Yes, yes . . . Economic cycles,

catastrophic events, etc.

• But …• The product itself• Human nature in general

– Company management– actuaries


Can Anything Be Done?• Yes, but we will always have a cycle• Do your rate indications – where are

they?• Do your rate indications – do them more

often• Stop being so passive – leadership is

needed• Better communication


What to Expect

• The cycle will repeat

• Relative rate adequacy has slipped especially Ontario Auto

• Industry ROE results are still okay

• Market likely to remain soft until industry ROE results deteriorate.

• Eventually markets will harden


END OF PRESENTATION

Documents

Market & Cycle How Long Can We Stay Profitable? A Canadian Perspective Presented by: Kevin A. Lee FCAS, FCIA Executive Vice-President IAO Actuarial Consulting