ANDREW WILLIS | The Globe and Mail
AIG Insurance Co. of Canada is quietly exiting the domestic home and auto insurance business, the latest player to quit the domestic market amid a consolidation trend that’s contributing to a rise in insurance rates.
The Toronto-based division of American International Group Inc., one of the world’s 20 largest insurers, decided earlier this year to shut down a business that catered to wealthy Canadian clients. Policies will not be renewed as they expire over the next 12 months.
The unit was an offshoot of a successful service that AIG offers ultrahigh net worth customers in the United States and Europe. New York-based AIG published a report on the needs of the wealthiest Americans showing these customers typically own nine homes, 19 automobiles, US$19-million of art and US$1.7-million of jewellery. The annual cost of insuring these possessions runs to US$250,000 or more. In Canada, this would be a small segment of the high net worth market.
“The individual personal insurance line of business represents a small percentage of our portfolio in Canada and based on market conditions, we have decided not to underwrite new policies in this area,” AIG Canada spokesperson Lynn Woodburn said. “This decision does not affect the rest of AIG Canada’s portfolio.”
In Canada, AIG ranks as the country’s 13th-largest property and casualty (P&C) insurer, with a 2.2 per cent market share, according to the Insurance Bureau of Canada. The company has 35,000 Canadian clients and 425 employees in the country.
Filings to federal regulators show its Canadian clients paid $54-million for home and car insurance in 2017, the most recent available data. Property insurance claims from AIG’s clients outstripped premiums by $13-million, which would imply the division lost money, while the company took in $8-million more in car insurance premiums than it paid out in claims.
AIG is sticking with its core Canadian corporate clients, which paid the company approximately $400-million annually over each of the past three years for products such as liability insurance. Globally, AIG restructured after suffering significant losses during the global financial crisis and is now on secure financial footing: The company posted a US$1.4-billion profit in 2018.
AIG’s exit comes amid increased consolidation of the auto and home insurance sector. Intact Financial Corp., the country’s largest P&C insurer with 15-per-cent market share, has acquired a string of rivals over the past decade, including the $2.6-billion acquisition of AXA Canada in 2011. In 2015, Desjardins Group bought the Canadian P&C arm of State Farm Life Insurance Co. for an estimated $1.3-billion, and is now rebranding the unit.
Privately owned Economical Mutual Insurance Co., the country’s eighth-largest P&C company, plans a $1.9-billion initial public offering in large part to access the capital the Waterloo-based company needs to acquire rivals.
Foreign companies are also consolidators in Canada. The country’s second-largest P&C insurer is Aviva Canada Inc., which has a British parent, and the company spent $582-million to buy Royal Bank of Canada’s P&C insurance operations in 2016. New York-based Travelers Co. Inc. acquired Dominion of Canada General Insurance Co. for $1.1-billion in 2013, vaulting the company into 10th spot in the domestic market.
For the remaining Canadian P&C insurers, consolidation translates into greater scale and pricing power, according to analysts. In a recent report on Intact, CIBC World Markets analyst Paul Holden said, “Industry return on equity has been running well below historical averages (2018 could be around 5%), but rates are firming across many markets (personal auto, personal property and commercial lines).”
Analysts expect the largest insurers to continue snapping up smaller rivals. Mr. Holden said at Intact, “management views the current environment as very favourable for Canada M&A. … Our impression based on the [fourth quarter] conference call is that Intact expects to do a deal this year.”
For drivers, fewer P&C insurers is expected to translate into rising auto insurance rates in provinces served by private companies. There are government-owned auto insurers in British Columbia, Saskatchewan, Manitoba and Quebec.
The Financial Services Commission of Ontario, a government agency, signed off on a 3.35 per cent average increase in the price on car insurance in the last three months of 2018. The provincial watchdog said further hikes are expected, as “insurance companies are reporting an increase in claims costs for repairing vehicles.”
The Ontario agency said the P&C insurance industry also highlighted “growing concern related to distracted driving. As the number of accidents due to inattentive driving increases, so too do the claims costs.”