Why are Insurance Rates Increasing?

This is a basic explanation of what is currently taking place in the Canadian insurance industry.

What Occurred Between 1994-2001?

• Claims inflation has increased 5% annually on average.
• Consumer Price Index has increased 2.7% per year on average.
• Litigation costs have doubled.
• Frequency of bodily injury claims per 1000 automobile accidents has doubled.
• Insurance Fraud now amounts to over $1.3 Billion per year in Canada or 10% of total claims payments.
• Consumers have been receiving more comprehensive insurance coverage while paying less.

Every year since 1978, the Canadian insurance industry has paid out more in claims and expenses than it has collected in premiums, therefore, operating at a deficit.

Insurance Companies generally make their profit though their investment operations.

With over 200 insurance companies in Canada, and an excess of capital, the market is highly competitive and cyclical.  As a result of the above, premiums have been driven well below break-even levels.

A significant deterioration in the Insurance Industry Profit is forcing the industry to increase existing premiums.

The insurance industry, like every business, needs to produce a reasonable Return on Investment to maintain viable operations in Canada.

Insurers have an obligation to policy holders as well as shareholders - policy holders deserve value for their premium dollar while shareholders demand a reasonable Return on Investment.

What is Causing Rates to Increase?

The main principle of insurance is that the premiums of the many pay for the losses of the few.  This allows the typical consumer to protect their assets and safeguard against potential liabilities (lawsuits, fires) for a relatively low cost.  When the industry loses money, all consumers contribute to the cost through increased insurance premiums.

Declining Return on Equity.

Increasing claims frequency and severity.

Poor performing stock market and low interest rates have resulted in lower investment returns for insurers.

Fraudulent and inflated claims drive up premiums.

Global catastrophies (e.g. Hurricane Andrew, Quebec/Ontario Ice Storm, Calgary Hailstorm, UK Floods/Storms, Earthquakes).

Global terrorist threats and activities.

Significant increases in the cost of reinsurance for all insurers.

The Impact of September 11th, 2001 on the Insurance Industry

The September 11th events have resulted in estimated total insurance losses between $60 and $80 Billion US, making this tragedy the single largest financial catastrophe on record.  This will affect every insurance buyer worldwide.

Reinsurers provide stability and support to the industry by insuring the portfolios of insurance companies.  In the wake of September 11th and ongoing financial pressures, reinsurers will have to significantly increase their premiums.  The financial impact of these increases will reverberate throughout the industry.

Recent Catastrophes & Insurance Premiums

Since these statistics were made available, more recent catastrophes continue to effect premiums (e.g. 2004 Atlantic hurricanes Frances, Charley, Jeanne and Ivan as well as the 2004 Asian tsunami creating considerable damage in different parts of the world).