MSA Ratios

Study guide: Exam 6C

MSA Ratios are the standardised financial ratios computed from Canadian P&C insurers' regulatory filings and published by MSA Research — the industry's common analytical vocabulary. Because every insurer files the same Canadian Annual Return on the same instructions, the ratios are genuinely comparable across companies, which is what makes external analysis of the Canadian market possible.

\text{Combined ratio} = \frac{\text{Claims incurred} + \text{Expenses}}{\text{Earned premium}}

• Profitability: loss ratio, expense ratio and combined ratio (below 100\% is an underwriting profit); return on equity; investment yield; and the operating ratio, which nets investment income against the combined ratio.
• Leverage: premium to surplus (how much business is supported by each dollar of capital) and reserves to surplus (how exposed surplus is to a reserve error). A reserves-to-surplus ratio of 3 means a 10\% reserve deficiency consumes 30\% of surplus.
• Reserve adequacy: one-year and two-year development on prior-year reserves as a percentage of opening surplus — the ratio that most directly signals a reserving problem, and the analogue of the US Schedule P development measures.
• Capital and liquidity: the MCT ratio and its trend, liquid assets to liabilities, and change in net written premium (rapid growth being a standard failure precursor — see PACICC).
• How to read them. No single ratio diagnoses anything. The combination that signals distress is the one PACICC's failure research identifies: rapid premium growth, high premium-to-surplus leverage, adverse development, and a falling MCT ratio appearing together.
• The IFRS 17 complication. Insurance Revenue is not earned premium and Insurance Service Expenses exclude discount unwind, so ratios computed post-transition are not directly comparable with pre-transition history. Any multi-year ratio series spanning 2023 must be read with that break in mind.

Diagnosing an Insurer From Its Ratios

Ratio	Insurer	Industry
Combined ratio	103\%	96\%
Premium to surplus	2.8	1.4
Reserves to surplus	3.4	1.9
One-year development	+7\% of surplus	-1\%
Growth in net written premium	+31\%	+5\%
MCT ratio	154\%	221\%

Assess.

Answer Every ratio points the same way, and together they are the classic pre-failure profile.

1. Growth of 31\% against an industry 5\%. An insurer growing six times the market is winning business on price, not on selection — nobody hands over that much share for any other reason.
2. Combined ratio 103\% confirms it: the business is being written at an underwriting loss.
3. Leverage of 2.8 times surplus, double the industry. The insurer is supporting twice as much business per dollar of capital, so the same loss ratio hurts twice as much.
4. Reserves at 3.4 times surplus means a 10\% reserve deficiency wipes out 34\% of surplus. There is no room for error.
5. Adverse development of 7\% of surplus shows the error is already occurring, and given (3), the true deficiency may be larger than reported.
6. MCT at 154\% — near the supervisory target, and with growth continuing the Base Solvency Buffer rises every quarter while losses reduce Capital Available. Both sides of the ratio move against it.

The mechanism. Growth is funded by capital the insurer does not have, at prices that do not cover cost, with reserves that are already proving light. This is precisely the sequence PACICC's failure research describes, and the remedy — stop growing, raise rates, strengthen reserves, raise capital — is one the insurer will resist because it means shrinking.

What should happen: OSFI escalates, requires a capital plan and restricts growth; the Appointed Actuary's FCT report models whether the minimum is breached under adverse scenarios; and the reserve adequacy question is answered independently rather than by the same process that produced the current estimate.