Hopes and Resolutions

While 2000 was the year that “should have been, but wasn’t” in terms of industry price corrections, Canadian insurance CEOs appear to be approaching the new financial year with a steely and determined discipline.

In fact, they should. After two years of dismal financial performance with an industry average return on equity of between 6% to 7%, the fact that urgent action would have to be taken became clearly obvious. The issue at stake now is how drastic the implications will be. U.S. property and casualty insurers have already seen a management chewing out with the likelihood of further changes and cutbacks. Commercial rates south of our border have also been raised across-the-lines by anywhere between 25% to 200%, while personal lines are beginning to show strengthening with auto targeted for possibly significant rate hikes. Whether the same management rousing will occur in the Canadian market, coupled with harsh rate adjustments, will largely depend on what happens in coming months. One thing insurer CEOs and shareholders are aware of is that whatever positive actions taken this year will only translate to real growth in the 2002 financial year – thus leaving a pall over the industry for the year ahead.

However, on a more optimistic note, a quick survey of what company CEOs expect to achieve either individually or collectively as an industry offers some hope. All are resolved that the financial numbers have to improve, which can only happen through rate adjustments and cost-cutting, even if this means losing unprofitable marketshare. “We [insurers] will all be closing the year [2000] with inadequate results, there’s no question that pricing of the business is the top issue,” comments Mark Webb of CGU Insurance Co. of Canada. Webb, plus several other leading personal lines insurers, expect this year will also see rationalization and convergence of distribution modes, increased technology investment with emphasis on online, real-time capability, and legislative product and tax reform.

As Webb observes, “It’s high time we as an industry move on automation – we need cooperation, not competition – enabling us to enhance efficiency on the distribution end which at the moment contains too much duplication at a cost we can’t accept”. Furthermore, he expects the federal government’s financial services Bill-38 will proceed without complication through parliamentary approval this year. Insurers are also confident that Ontario’s no-fault auto insurance legislation under Bill-59, which the Insurance Bureau of Canada (IBC) has been actively lobbying the Ontario government to readdress its accident benefit scope, will receive much needed reform this year, Webb says. If handled in a timely and responsible manner, the “tweaked legislation” could avoid the need for insurers to introduce significant and politically unpopular rate increases during the course of this year, he adds.

Besides product and price corrections, other priorities facing the industry in 2001 include countrywide revision of healthcare costs relating to auto insurance (see cover article of this issue of CU) and taxation reform, says George Cooke of the Dominion of Canada General Insurance Co. Another item which will likely come up on the agenda is discussion over the merits of privatizing the B.C. insurance market, although this is a “hot potato” that will take some time to reach any kind of a conclusion, Cooke concedes. He does, however, expect the industry through the IBC to make “significant inroads” on the federal front with the other sticky issues of healthcare and taxation.

Terry Squire of the Co-operators General Insurance Co. expects further action will have to be taken by the industry to eradicate fraudulent costs. With consumer pressure remaining to keep rate adjustments on a moderate scale, the industry will have to squeeze out inefficiencies in the claims handling process. “When we’re paying out close to 80 on the dollar on claims, then we have to be more vigilant.” Squire also believes that insurers will have to pick up pace on technology development in order to achieve necessary operational cost-efficiencies.

All in all, there seems to be a buzz of revitalized activity within the industry – the juices flowing with the expectation of a new year and maybe a new start. If in the year ahead insurers are able to achieve even half of the objectives outlined above, I would say that the industry is indeed set on a solid course back to prosperity.