BRACE FOR IMPACT: Coronavirus, The Canadian Economy & Insurance

P & C industry professionals, commercial insurance brokers and underwriters all love stats. After all, our entire industry is based on analyzing data and understanding trends.

So, before we get started, let me start off with some statistics about the financial position for the average Canadian before the COVID pandemic:

• Between 47% and 53% of Canadians were living paycheck to paycheck
• Canadians owed 2.16 trillion in mortgage, credit card & other consumer debt – up 80% from 2008. This amount now exceeds the value of the entire Canadian economy. To put this in perspective, Americans did not have this much debt during the 2008 financial crisis.
• 14% of new-car buyers owed $7,051 more on their existing car loan than the vehicle they’re trading in is worth.
• As of March 2019, auto loan delinquencies hit the highest rate since the great recession
• The mortgage delinquency rate was highest since 2012
• The debt – to – income ratio was 173 – This means for every $1 in income the average Canadian carries $1.73 of debt.
  • In Toronto and Vancouver, this number was 208 and 242 respectively.
• Nearly half of Canadians were $200 away from insolvency
• 85% of new passenger vehicles are financed or leased

Reminder, these are stats from 2019.

Until Debt Tear Us Apart

I have been trying to remain positive day-by-day, but I believe it’s time we stop fooling ourselves; Canada is about to go into a major recession as these levels of individual debt are simply not sustainable.

Add to the equation people losing their jobs and you have yourself a real sticky situation.

Just last week the Government of Canada announced it had received more than 500,000 new applications for Employment Insurance within a period of 4 days.

Truth be told, if our economy was actually healthy before the Coronavirus pandemic, why are Canadians in so much debt?

Sure, we’ve had steady GDP growth along with a stable low unemployment rate for the past decade, but it was partially fueled by low interest rates set by the Bank of Canada.

Historical low rates are one of the main reasons why Canadian real estate prices have outpaced household income; wage growth has not kept up with the cost of living either.

When interest rates are lower, it’s easier for the average Canadian to buy a home, and when the number of buyers in a market increases, demand spikes. When demand spikes, prices go higher.

Here’s an example to put this into perspective:

In 1985, the average home in Toronto cost the average family 3.41 times their household income.

As of 2017, this number rose to 7.62.

And as of last year 2019, it had climbed to 9.86.

The average Household income for the GTA in 2019 was $83,020 while the average price of a home in the GTA was $819,319.

All of this to say, the Canadian economy is not stumbling as a result of the Corona Virus; it was already a ticking time bomb of debt and just needed an event to pop the bubble – if it wasn’t the corona virus, it would have been something else.

How A Recession Will Affect the Canadian P & C Insurance Industry

As insurance professionals, we are extremely fortunate to work in such a stable industry.

Being client-facing and as a Montreal commercial insurance broker, I’ve had “the talk” with a few of our business clients who are bracing for impact, particularly companies who work in hospitality.

May I say after talking to business owners on the front-line that the immediate future does not look promising for many Canadian sectors of the economy.

My hypothesis for the P & C insurance industry in Quebec

Short-Term 

• GWP (Gross written premiums) will shrink overall for both commercial and personal lines. This will be due to a significant economic downturn in the auto loan sector as well as in the mortgage sector. Canadians with no disposable income are unable to buy new cars or new homes and many Canadian businesses will permanently close as a result of COVID.
• It’s no secret that insurance has entered a hard market (insurance premiums are higher) due to the increased cost of claims & other factors. This will add insult to injury and will cause an increase in client cancellations for non-payment, putting further downward pressure on GWP.

As stated earlier, overall it will be business as usual for insurance brokers and insurance companies but it will be challenging to maintain revenue or have growth during these times. Most brokers and companies will lose clientele.

Long-term

The gap between the “big” and “small” competitors will grow.

The industry players to suffer the most will undoubtedly be the broker channel, in particular small insurance brokers who specialize in small commercial, home & car insurance.

Please allow me to explain.

Personal & commercial insurance brokers who cannot afford or who are unwilling to invest in client acquisition initiatives will fall further behind the competition because they cannot replace the clients they lose. The double whammy of COVID and a hard market is going to result in lower retention for the industry as a whole.

Clients shop when they receive big renewal increases & Quebec (along with other provinces) have multiple insurance companies and brokers who want to gain market share and who can offer policy savings to new business.

Therefore, P & C companies & brokers who invest in client acquisition initiatives will be able to weather the storm of a hard market because they can replace their lost business.

When all is said and done, they emerge stronger as it allows them to bring their book back to profitability and service fewer clients while still earning the same revenue.

As a result, insurance companies and brokers who are on the offense gain market share during a hard market, while smaller brokers on the defence lose ground.

Conclusion

It’s been almost 11 years since Canada’s last recession, so we knew this day was coming sooner rather than later. Given the current debt situation for the average Canadian, I predict this recession will hit much harder than economic downturns in the past.

Insurance will remain more or less stable throughout the recession, and in the province of Quebec (where I reside) the one-two punch of a hard market and COVID will undoubtedly impact retention for insurance brokers & companies. It won’t bankrupt anybody, but it will cause a contraction for the industry.

The aftermath of a recession will result in further separation between the big insurance brokers and the small mom & pop shops as the larger companies will invest in client acquisition initiatives to replace lost clientele. This recession will further accelerate industry consolidation along with broker acquisitions.

Since the start of the pandemic, my brokerage KBD Insurance has experienced a slowdown with regards to call volume in the home & car division; in the business division we have been slow for about 2 weeks. We are taking this time to contact our clientele, update them on the services we offer and see if there’s any way we can cross sell additional products to help our clients save money.

As an insurance broker, have you experienced a big slow down in business to date? How do you plan on coping with the looming recession?