Beware of cash flow underwriting: Why one expert is sounding the alarm 

When interest rates stay high for a sustained period, insurers might start writing more policies because they can make money on their investment yield, even if the underwriting itself isn’t profitable. It’s called “cash flow underwriting,” and one economic expert warns its return could hamper Canada’s P&C industry’s profitability amid tariff worries.

“The risk is that, over the medium term, if insurers can make a profit solely on their investment result, they tend to get very enthusiastic about reducing rates and chasing business in order to get more premium in the door,” says Alister Campbell, president and CEO of the Property and Casualty Insurance Compensation Corporation. “And that can make the whole industry less comfortable, especially when yields come back down again.” 

Insurance companies have two primary sources of income — investment and underwriting, as Campbell explained during Canadian Underwriter’s Economic Outlook 2025 webinar Tuesday.

Canadian P&C insurers’ net investment returns took a huge hit from the impact of rising interest rates in 2022, when the Bank of Canada aggressively increased interest rates to combat inflation. In 2021, the industry’s net investment income totalled $2.35 billion; in 2022, it was just $156 million.  

Investment income rebounded in 2023. That, plus a return to more normal underwriting conditions, saw Canada’s P&C insurers earn an ROE of 16.2% — the fifth highest since 1975. 

Twists and turns  

But market disruptions are bad news if investment income is used to support reduced premiums or unsustainable underwriting terms. And that economic uncertainty is manifesting itself in the form of tariffs.  

“What’s happening now, is a twist in the curve — not just [interest rate] movement in one direction,” says Campbell. “Central banks are responding to recessionary trends, plus all the uncertainty of the Trump tariff dynamics, and are trying to drive interest rates on the short end down because they’re worried about economic activity.

“But at the long end of the curve, interest rates have been trending up.” 

That’s causing interest rate pressure in both the short-term and long-term, says Campbell. 

“I’d say that in the next 18 months, if this uncertainty prevails, and if long-term yields continue to climb, that will have a mark-to-market impact on our current book of business.” 

The Bank of Canada announced Wednesday it would hold the key interest rate at 2.75%. 

“With uncertainty about U.S. tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, Governing Council decided to hold the policy rate as we gain more information on U.S. trade policy and its impacts,” BoC’s statement reads. “We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.”