Anyone who has ever met a Canadian citizen knows they don't like to be mistaken for American. The same can be said for the country's insurance and reinsurance sector, which despite its close proximity and ties to the US, maintains its own individual character. Ronald Gift Mullins reports.

Land of maple syrup, ice hockey, the Rocky Mountains and Tim Hortons coffee (a national obsession). Although the second-largest country in the world (after Russia), close to 90% of Canada's 33.1 million citizens live within 100 miles of the US border. Being so close, it was natural that Canada's economic progress would in some ways be similar to its blustery neighbour's development to the south. Mobilising its immense natural resources, skilled labour force and modern capital plant, Canadians have benefited greatly. Real growth of its $1.1trn gross domestic product (GDP) is estimated to be 2.8% for 2006, with GDP per capita at $35,200.

Canada is a member of the Organization for Economic Co-operation and Development, the World Trade Organization and the Group of Eight, among others. Although the Canadian government intervenes slightly more in regulating private business than does the US federal and state governments, it is less intrusive than in most European countries. Canada ascribes fully to a free market system. The economy has grown rapidly and coupled with low unemployment and large government surpluses, the Canadian dollar has risen in value against most major currencies, including the US dollar, since the turn of the 21st Century.

Canada became a self-governing dominion in 1867 while retaining ties to the British crown. Since World War II, what was once an agricultural economy has been transformed into powerful manufacturing, mining and service sectors, which has encouraged its population to relocate from rural areas to urban environments. While relatively free of internal turmoil involving race, income or religious issues, the country does face serious challenges in maintaining and improving its national healthcare programme and education facilities.

An astounding 68.5%

The economy's sectors break down as agriculture, 2.3%, industry, 29.2%, and services, an astounding, 68.5%, which employs about three quarters of working Canadians. As part of the services sector, the insurance industry had net written premiums of over $33.9bn in 2005, and controlled assets of about $102.7bn, according to the Fact Book published by the Insurance Bureau of Canada. Since 2001, net premiums written have leapt from $21.2bn to $27.5bn in 2002, $31.4bn in 2003 and $33.3bn in 2004, an increase of $11.7bn in five years. Compare that to the growth from $7.9bn in 1984 to $21.2bn in 2000, an increase of only $12.2bn in 16 years. Canada's private general insurers directly or indirectly employ about 100,000 people, including independent brokers, adjusters and actuaries.

At least 210 private general insurance companies actively compete in Canada, but only about 100 write the vast majority of business. In addition, mandatory auto insurance coverage is provided exclusively by insurers owned and operated by governments in British Columbia, Manitoba and Saskatchewan. The bodily injury portion of automobile insurance in Quebec is provided by a government-owned insurer.

The breakdown of insurers and reinsurers include 92 Canadian property & casualty insurance companies, 98 foreign property & casualty insurance companies, 27 reinsurers, 96 life insurance companies and 19 fraternal benefit societies. About 100 of these companies, both Canadian and foreign-owned, provide most of the general insurance purchased in Canada. Insurance companies invest mostly in domestic government and corporate bonds, and in preferred and common stocks.

Standard & Poor's outlook on the Canadian property and casualty insurance industry remains stable. "Although the operating performance has been quite good and capital has been strengthened over the past several years," the report said, "the industry has likely reached the peak of the cycle that normally spans a duration of about five years. The industry's performance continues to be driven by the supply and demand dynamics of a highly competitive sector that is fragmented and largely dependent on third-party distribution."

The report mentions that recent automobile reforms have been effective at containing a sudden increase in claims from fraudulent accidents and subsequent expensive treatments for soft tissue injuries. With normal competition, price-cutting strategies have been pursued by some industry participants in an effort to gain or maintain market share. Nevertheless, Standard & Poor's believes that recent memories of spiralling claims should lead to more moderate cycles and the industry is not expected to test the lows experienced in 2002 anytime soon.

Ripe for consolidation

With such a large number of smaller insurers, the industry remains ripe for further consolidation. The continued emergence of a few large companies is expected to result in these companies achieving scale, price leadership, better underwriting and claims management. "Until stronger pricing leadership is established within the industry and tighter control of distribution occurs, the cyclical nature of the industry will continue," the report said.

With assets of approximately $4.4bn, Co-operators General Insurance Company is the leading Canadian-owned, multi-product insurance company. It is the third-largest P&C insurance company in the country. Gross written premiums in 2006 were $2.1bn, up from $2bn in 2005. Net income fell to $118m in 2006 compared with $132m the previous year. The combined ratio was 99.8% for 2006, up slightly from 98.1% in 2005.

ING Insurance Company of Canada and its subsidiaries rank as the largest P&C insurance company in Canada. For full year 2006, the company produced $3.82bn in net premiums written compared with $3.8bn in 2005. Net income was $658m in 2006, down from $782m in 2005. Its combined ratio of 89.4% in 2006 was slightly higher than 86% in 2005.

Auto insurance ranks as the largest single line of the general insurance industry. Total premiums for this sector are more than those for all other classes combined. Property insurance ranks second and liability insurance is third. General insurance companies are supervised by the federal and provincial governments. The Office of the Superintendent of Financial Institutions (OSFI) supervises institutions and pension plans that have federal charters. OSFI's legislation states that it "has due regard to the need to allow institutions to compete effectively and take reasonable risks." Financial supervision by provincial superintendents of insurance is limited mainly to insurers operating under provincial charters.

Kevin Maher, director, Standard & Poor's, observed that the overall, the Canadian insurance industry is well regulated, well managed, and provides a favourable environment for companies to do profitable business.

Negative to positive

Reinsurers entered 2007, a softening phase of the market, with replenished balance sheets due to strong earnings and improved loss reserving positions, according to a report by the Insurance Bureau of Canada. In early 2007, rating agencies changed their negative outlook, originally assigned nearly two years ago, to "optimistic", due in part to the strong 2006 full-year financial performance of reinsurers, with many carriers reporting record earnings.

The Canadian life and health insurance industry's 2005 assets increased by 8.4% to $370.6bn at the end of 2005. Total premiums and premium equivalents rose 7.8% to $62.8bn, according to the Canadian Life and Health Association. Though there is a national health plan in Canada, insurers can offer supplemental health products such as disability income protection, extended-healthcare coverage and reimbursement of dental care expenses.

Last year was one of the P&C insurance industry's strongest years on record, the result of both strong operating performance and light losses from natural disasters. The 1 January 2007 reinsurance renewals, which were described as "orderly" and "satisfactory", reflect these results, the report noted. There was an obvious contrast in Canada as in some other parts of the world between 2006 renewals, when the market was dealing with catastrophe claims of 2005, and 2007 renewals, when the market was digesting record profits from 2006's quiet disaster-loss year.

Rates were generally stable across all lines of business. There was a slight decrease in proportional lines while regular property excess-of-loss went up as did some liability excess-of-loss. Despite some signs of rate competition in some lines, underwriting discipline prevailed at the year-end renewals. Capacity at the end of 2006 was more than adequate to meet insurers' demand for coverage, even for peak exposures. "Expectation is that the reinsurance market will soften somewhat due to ample capacity," S&P's Maher said, "as it has not felt any of the affects of huge cat losses as is common in the US."

While the Canadian market has not experienced severe catastrophic losses as those that slashed the Gulf states of the US, reinsurers operating in Canada suffered several weather-related and commercial losses that resulted in reinsurance rate hikes in 2006. The August 2005 storm that hit Ontario was the most costly natural catastrophe in the province's history and may cost up to $500m in insured losses once all the claims have been processed. On the commercial side, there was the explosion at Suncor Energy Inc's refinery in Alberta, which left a gross insured loss of $1.5bn. The bulk of this exposure has been passed on to international reinsurers. Although the incident resulted in a temporary strain to a handful of insurers, it did not result in permanent solvency issues for any domestic players.

No time for complacency

Overall, the reinsurance industry completed the January 2007 renewal season with calm resolve. "Nonetheless, there is an abiding sense that the healthy market returns of 2006 and quiet times in reinsurance renewals may not last," the report warned.

"Going forward," said Suela Dibra, research associate, Insurance Bureau of Canada, "since losses from natural disasters are more likely to be aggravated by the effects of global warming there are opportunities for future insurance and reinsurance business in Canada. In 2005, ten insurers entered the P&C insurance market which positively affects demand for reinsurance."

Ronald Gift Mullins is an insurance journalist based in New York City.