Devil in the Details (October 01, 2002)

The fifth annual P&C Strategy Summit held September 23-24 featured timely thoughts from industry participants on how to persevere and maintain underwriting discipline in a hard market.

Execution of business fundamentals, not necessarily high-blown strategic plans or tactical maneuvers, is the key to staying profitable in a challenging environment, according to several speakers. And, conference attendees were heartened to hear that the Ontario government is finally executing its plan for what many consider to be badly needed auto insurance reforms.

TREATING BILL-59

After a prolonged period of inertia and minor tinkering, Ontario Tories led by MPPs Rob Sampson and Ted Chudleigh, are getting serious about substantive changes to Bill-59. In a keynote speech at the conference, Sampson gave timelines for the reform process. A draft of legislative and regulatory amendments was unveiled September 16, with consultation among interested parties until October 4. Sampson says he expects legislation in this fall session and changes “before the end of the year”.

The draft legislation differs in some key areas from the private member Bill-166 Sampson sponsored in the summer – a bill he said will likely be withdrawn. The main features are increased access to tort for excess health costs, new guidelines for treatment and assessment of certain types of injuries, an improved dispute resolution process and a more efficient rate regulation system. A few other wrinkles are thrown in, such as expanding the definition of catastrophic impairment and giving subrogation rights to the Workplace Safety and Insurance Board (WSIB).

Sampson acknowledged that medical and rehabilitation issues are the key drivers behind increased costs in the auto insurance system. He cites three particular trends as being troublesome – the growth of assessment versus treatment costs, the rise in minor, soft tissue injuries, and the overall increase in the cost of the med/rehab system. “I don’t know anyone who has suffered an injury and said they feel better because of an assessment,” he said. “We have to start moving the dollars away from assessment and into treatment.”

Insurers and health care providers have come up with a rough consensus on treatment guidelines for various injuries, particularly those that Sampson calls “inside the box” – standard claims that will no longer require any prior insurer approvals or examinations. Those claimants who have multiple injuries or injuries that fall outside the guidelines will require prior insurer approval for assessment and treatment.

FRAUD ONSLAUGHT

In terms of fraud, the draft proposes enshrining in legislation serious penalties and fines – up to $100,000 – for unfair and deceptive acts and business practices. Sampson says he is concerned as well about conflict of interest issues, such as tow truck drivers owning partial or majority interest in rehabilitation clinics.

Sampson stresses that any equitable solution to the problems facing Ontario auto insurance will require concessions from insurers and service providers, ranging from lawyers to rehab clinics. “Someone asked me recently, ‘who is going to be happy with these reforms?’ My answer was that no one will be completely happy and perhaps by making everyone a little unhappy, we will strike some sort of balance.”

For insurers, some concessions outlined in the draft legislation are unacceptable. The Insurance Bureau of Canada (IBC), in a submission to the Tory auto insurance review committee September 23, said certain proposals, such as expanding catastrophic impairment and giving subrogation rights to WSIB, will simply add more costs to an already burdened auto product.

The absence of a “file-and-use” rate system in the draft was of particular concern to the IBC. “The government needs to go further in opening up the rate approval system,” the bureau said in its submission. “Given the high level of competition in the Ontario auto insurance system, it is time to move to a file-and-use system as already adopted in other jurisdictions.”

REGULATORY EFFICIENCY

This concern with regulatory processes struck a familiar chord at the Strategy Institute conference. Alain Thibault, president and CEO of Meloche Monnex Insurance Co., says the regulatory burden in the property and casualty insurance industry has become “overwhelming”. He adds, “let me be clear: I think there is a need for regulation. But when you look at the various levels of regulation, it becomes onerous. This is one of the biggest issues we face, because the time it takes to address regulatory issues is time taken away from running the organization and serving customers.”

Regulatory issues represent just one thorn in the heel of insurers. The biggest concern is simply profitability, or lack of it, according to conference chair Glenn McGillivray, assistant vice president of corporate communications for Swiss Reinsurance Co. Canada.

He notes that paltry returns in the p&c industry in Canada are echoed in the worldwide market, where reinsurers and insurers are struggling with sluggish profits. “Why would shareholders invest in the p&c industry when the real rate of return over the past two years is about 1%? You might as well put your money in a chequing account.”

At least part of the profitability issue is a made-in-the-industry problem, according to panelist Gerry Wolfe, vice president and chief agent in Canada for General Reinsurance Corp. “In this industry, we have to focus much more on execution in our underwriting. We need to underwrite for profit only, not for cash flow, marketshare or even relationships. We need to underwrite based on future performance, not past experience. We also need better analysis, better metrics and better MIS in our underwriting. It has to become more science than art.” Wolfe says he has noticed that some primary underwriters tend to be “squeamish. We need underwriters that can say no and be clear and consistent about what kind of risks they will accept and how they will be classified.”

BROKER POSITION

And, what of brokers in this current market of underwriting discipline? Jim Aston, president and COO of Sinclair Cockburn Financial Group, says brokers have a role to play as watchdog for consumers. “We have to make sure that underwriters are doing their jobs and claims adjusters are doing their jobs. That is one of the things that falls on us in this kind of market.”

Aston also notes that the broker’s role cannot stop there. “We have to capitalize on ways of making business easier and encourage companies to experiment with new processes,” he said, citing Lombard’s “Business Choice” and LINCQ software and Royal & Sun Alliance’s call centers as good examples.

There are small signs that the worm may be starting to turn for the insurance industry. Premium growth is up in Canada, underwriting discipline is slowly returning and regulatory reform, at least in Ontario auto, is on the horizon. Sampson’s presence alone at the conference was a welcome sign that governments are starting to pay attention to insurance issues. But these positive indicators still pale beside the significant hurdles of low investment yields, difficult product lines (especially Atlantic and Ontario auto), increasing claims costs and single-digit returns on equity. The ability of companies to sharply execute their business strategies will separate the survivors from the early “exiters”, according to speakers at the conference. “A lot of companies are looking for the flavor of the month,” observes Wolfe. “But the answer, proper execution, is right in front of their noses.”