Are Insurance Companies Ripping Us Off? The Results Might Surprise You.
We all know someone, maybe even yourself, who has been paying for auto insurance and home insurance for years, has never had a claim, and finds it hard to justify paying for insurance coverage. They’re usually safe drivers, who keep their walkways at their home clear of snow and ice, and have maybe installed a home alarm to prevent burglaries. As they renew their insurance policies year after year with no insurance claims, they might wonder how much money the property and casualty insurance industry actually makes. Believe it or not, the insurance industry does not make as much money as most people think.
Where do Insurance Companies Rank?
According to the Globe and Mail who ranked the most profitable companies of 2013, among the top 50 companies in Canada, only one P&C insurance company made the list, Intact Insurance at #43. And the P&C industry as a whole (about 200 companies) made less than half the profit of Royal Bank on its own. There are also restrictions on the insurance industry from the government; insurance companies must keep enough reserve money to pay for future claims, and the government has major influence on auto insurance premiums.
How Insurers Make, or Lose, Money
There are two ways that insurers can make, or lose, money. One way is through operating profit or loss; the premiums they collect, minus operating expenses and paid claims, is called underwriting profit or loss. According to the Insurance Bureau of Canada, from 1990 to 2002 and again in 2008, the insurance industry paid more in claims and expenses then they collected in premium. Most non-insurance companies who operate at a loss for 12 straight years would not survive. In 2012, the most current year the IBC reported loss ratios, the total combined underwriting profit was 4.7%.
Insurance companies do not usually earn significant revenue from underwriting; most revenue is earned through their investments. If the insurance company makes money from underwriting, it is usually invested into the stock market, bonds and/or real estate, to name a few. Many people do not realize that insurance companies are taking a risk in two ways; they could suffer an underwriting loss, and they could also suffer a loss on the investments they make. Very few industries have this level of added risk exposure.
Another issue facing property and casualty insurance companies is the risk of catastrophic losses. While the Ontario/Quebec ice storm of 1998 and the flooding of Toronto and Calgary in 2013 resulted in millions of dollars in damages, these events would be dwarfed if a major earthquake occurs in British Columbia, up to $75 billion in possible damages according to the IBC. This is just one example of a potential catastrophe that looms over the P&C insurance industry on a daily basis.
There are other factors to consider when referring to loss potential for Canadian insurance companies. Climate change, possibly a contributing factor to the major floods of 2013, is one of the leading concerns of the insurance industry globally. Cyber threats, staged auto collisions, fraud and terrorism could also have an effect on insurance, whether through higher prices for consumers, or worse, not having coverage available at all. Auto insurance, representing over 40% of all P&C insurance premiums in Canada, continues to be a problem for both insurance companies and consumers. Most of us only consider damaged or stolen vehicles when thinking about auto insurance, as usually this all that may affect them personally, but bodily injury claims, and the massive costs involved including medical treatment, have a major impact on both consumers and insurance companies.
- Related Read: Why Is Car Insurance So Expensive?
Insurance: Offering Peace of Mind and Value
The employees of KTX Insurance Brokers are also consumers of auto, home, condo and tenant insurance, and while it is sometimes an expense we would rather not have, we recognize the value and comfort insurance gives. Please visit our other blog posts to learn more about insurance.