IBAO 2001 Convention: Rates Back to the Future

“Our illusion that anybody, anywhere can control or predict the market is just that, an illusion,” says outgoing Insurance Brokers Association of Ontario (IBAO) president Dan Danyluk in his opening remarks to the association’s annual conference in Toronto recently. With the events of September 11 heavy on delegates’ minds, brokers and their clients face a period of accelerated rate hardening moving ahead, Danyluk admits. “It’s back to the future on the insurance cycle”, with the 2002 market shaping up to “have a lot in common with 1984”, he adds.

Back then, insurers reacted to insufficient rates, high losses and a crisis in the liability market with sweeping rate increases. While 2001 began with the recognition that rates would harden and the hope that this process would be less dramatic than the mid-1980s swing, the scenario has altered measurably by September 11.

Watershed event

Prior to the terrorist attacks, the industry was in rough shape, notes Don Alexander of Guy Carpenter. The rolling 12-month return on equity stood at 2.6%, underwriting results were deteriorating, investment yields were dropping and capital gains were falling. “The last time insurance and reinsurance companies made any dough was 1997. The owners of these companies are really unhappy.” Rates were, however, on the rise. “There had been nothing really dramatic happening”, but as has been the case following past catastrophes, that process will now be accelerated. Increases of 10%-15% in the reinsurance market will now be more in the range of 50%-70%, Alexander says, “big, big rate increases, even for clean business”.

September 11, or “Cat 48” as it has been labeled by reinsurers, was a “watershed” for the industry, with US$30-58 billion predicted in insured losses. Alexander puts his estimate at the top of this Tillinghast-Towers Perrin range. Reinsurers reacted swiftly, putting out early loss estimates and then revising those figures, often doubling them. Underwriting decisions were put on “hold”, with reinsurers unsure about what lines to offer and what to charge for them. “My analysis of the reinsurance business since September 11 is that it’s been in paralysis mode.”

While Alexander does not predict most reinsurers’ solvency will be tested, some smaller reinsurers could close their operations. At the same time, new capacity is entering the market, including Marsh’s AXIS Specialty and Renaissance Re’s DaVinci Re. Reinsurers’ previous taste for diversification may now be in question and the market is getting “technical”, using analysis and modeling and looking for ‘good’ information from insurers. Reinsurers are going “full steam ahead” on terror exclusions, and cyber exclusions that were already in the works, he notes. “Our reading is it’s [the reinsurance market] not in panic mode, but very cautious. We’re in for a very difficult negotiation period at yearend.” This is especially true given the limited amount of time before December 31 when most contracts are up for renewal.

Since only 7.5%-8% of insurers’ premiums go to reinsurance, even a 50% reinsurance increase should not translate to a 50% increase in the primary market, Alexander explains. However, past experience indicates that the industry, both primary and reinsurance, should brace itself for significant hardening. “The losses of the few are paid for by the premiums of the many. We can’t escape this one.”

Back at the table

Rate hardening is also hoped to be the order of the day for insurers operating in Ontario auto. The question is whether changes to the province’s auto insurance legislation will allow insurers more sway in increasing rates.

While Bill 59 was successful from a consumer’s standpoint, says Ontario Minister of Finance Jim Flaherty, the province is “aware of the pressure on insurers to increase rates”. He adds that the “human and financial resources” required to administer the no-fault benefits scheme are “of concern”. The government is currently reviewing feedback on its discussion paper on auto reform, which address issues including rate filing and stability, compensation for children and severely injured adults, and collateral benefits, Flaherty points out.

While Danyluk notes that the proposals “include issues we had thought previously resolved”, he adds that Flaherty is looking to make just one set of changes. And, although Flaherty acknowledges that some changes are necessary, he adds, “what we’re not looking at is a fundamental reform of the system”.

The system that is facing fundamental reform is Ontario’s financial services regulatory structure. Brokers have made known their unease about the merger of the Financial Services Commission of Ontario (FSCO) and the Ontario Securities Commission (OSC). “While the merger makes tremendous sense to intermediaries in the wealth management business, it doesn’t make sense to the p&c business,” says Danyluk.

Flaherty defends the merger, saying Ontario is “taking the lead” in responding to convergence in financial services. The merger, which will “make it easier to develop a common regulatory scheme” is needed “to ensure trading partners around the world want to do business here”. He hopes to have legislation prepared soon, and says the province will push through with both sets of reform despite the planned departure of the province’s premier, Mike Harris.

Making the connection

In previous years, broker conferences may have been highlighted by fears over how direct sales and the Internet may push brokers out of the market. But, as speaker George Nordhaus of Insurance Marketing & Management Services points out, this has not proven to be the case. Even in the U.S., where insurers have been quicker to jump online, numbers suggest only 5% of p&c insurance will be sold online. Several online insurance ventures have fallen short of the mark after hefty investments. “It isn’t working”, Nordhaus observes. “The Internet is not an end in itself. It’s a means to an end.”

Consumers continue to want the personal touch of a broker. “Disintermediation is done. They can’t get rid of you [brokers].”

Nordhaus’ vision of the future is that brokers will use the Internet to reach their customers, and will use it as a tool to cross-sell a variety of products, to become “meta-mediaries”. People want to buy all their financial service products from one place, although few presently do. He sees this as an untapped market. “This is vital to our thinking as brokers about what we’re going to do in the years ahead.”

While the average consumer buys more than seven insurance policies, less than two of these are p&c policies. And the real value is in policy renewals, not new business, which is generally not profitable in the first year. “Consumers won’t stray if they have additional products with a broker,” Nordhaus predicts.

The current technological tools used by brokers do not allow them to access the providers needed for this kind of multi-product approach. “You can’t sell everything if you have to go to 100 different places to find it.” The Internet, however, can change this by giving more seamless access to providers of financial services products such as annuities and even loans. Using the metaphor of the fast food restaurant that asks customers, ‘do you want fries with that?’, Nordhaus says that brokers can now use the Internet to sell “fries” in the form of multiple policies.

Ontario’s brokers can soon make the move online through the development of the new Centre for the Study of Insurance Operations (CSIO) portal. While in its first phase the portal will offer comparative quoting, CSIO president Klaas Westera says future developments will lead to a true SEMCI (single-entry, multi-company interface) solution.

One key will be to get “critical mass” from brokers, companies and vendors, he adds.

The portal is being developed to respond to several broker requirements, including interaction with broker management systems, which will be tested in December. Also, new critical coverage reporting requirements for Ontario auto will be taken into account.

Perhaps most importantly, the portal will allow for product differentiation in the quoting process, allowing brokers to set certain requirements, for example specific deductibles on auto policies, and for insurers to note product enhancements such as first claim forgiveness. “Believe it or not, personal lines products are not commodities,” says Westera, and flexibility in the system is key to assisting a competitive broker distribution force.