Neutral sector view supported by strong capital amid higher loss variability: DBRS Morningstar

Core Viewpoint - The outlook for Canada's property and casualty (P&C) insurance market in 2026 remains neutral, driven by strong capital positions and firm underwriting practices despite challenges from climate-related exposures and claims cost inflation [1][2]. Group 1: Market Conditions - The P&C insurance sector benefits from strong capital positions, firm underwriting practices, and cautious reserving, which help balance pressures from higher climate-related exposures and ongoing claims cost inflation [2]. - Earnings over the next 12 to 18 months are expected to support internal capital formation, although results may fluctuate due to elevated weather-related loss activity [3]. - The agency anticipates continued declines in many commercial lines in 2026, particularly for large corporate accounts where price reductions are most pronounced [4]. Group 2: Regulatory Changes and Pricing - Upcoming regulatory changes in auto insurance in Ontario and Alberta are expected to reduce premiums and introduce uncertainty regarding long-term earnings [5]. - The current easing trend in commercial insurance pricing began in mid-2024, supported by strong capital availability across the industry [7]. - Pricing pressure is strongest among large commercial accounts, while smaller and mid-sized businesses have seen steady or slightly higher pricing in some specialty areas [8]. Group 3: Catastrophe Losses and Climate Risks - Catastrophe losses are classified as a main credit risk for P&C insurers, with event frequency and severity elevated due to climate change [12]. - Wildfire exposure is expanding in regions like northern Québec, Alberta, and British Columbia, leading insurers to adjust pricing and policy terms [13]. - Reinsurance costs have been declining and are expected to continue falling, providing insurers with opportunities to lower expenses or secure broader protection [14]. Group 4: Company Performance and Trends - The neutral sector view reflects expectations for the overall market rather than the rating direction of individual companies, with more issuers showing positive trends than stable trends [15]. - Despite some companies outperforming, heightened climate-driven risk and rising claims costs limit the broader sector view from shifting to a more favorable stance [16].