IBAO Convention 2002: Stressed Relations

“Markets like these mean stressed relations [for insurers] with brokers and consumers.” Truer words were never better spoken than this observation made by Royal & SunAlliance Canada’s president Larry Simmons. Simmons partook in a insurer CEO panel debate hosted by the Insurance Brokers Association of Ontario (IBAO) at its 2002 conference recently held in Hamilton.

Simmons was among those defending the decisions of insurers which have left brokers scrambling for markets and selling hefty price increase to displeased consumers. Brokers came to the panel discussion armed with concerns, primarily over market availability, but also about how the industry got to its current state: with a return on equity below 3%, rate inadequacy in some lines by 20% or more, and strapped for capital as global parents view the Canadian market with a jaundiced eye. The concern, brokers point out, is not just one of rate increases – after all, for the most part rate increases equal higher commissions – but the inability to place business at all.

MARKET DROUGHT

Defending the decision to withdraw from markets, insurers took different approaches. Igal Mayer, president and CEO of CGU Group Canada, says withdrawal is not simply an underwriting decision. “It’s foolish to be in a line of business when you don’t have the competency.” But, Nicholas Smith, attorney-in-fact for Lloyd’s of London in Canada disagrees. “Withdrawal is an underwriting decision. If you can’t get the price, why write the business?”

The current “market drought”, while painful in the short term, will have the necessary effect of bringing back price discipline, observes ING Canada president Claude Dussault.

Insurers, no doubt, are struggling on the underwriting side, and no longer able to rely on investment gains to make up the shortfall. Corporate scandals have added to the overall burden on insurer portfolios, with bonds heavily affected by WorldCom and other failures. This hard market is unique, says George Cooke, president of Dominion of Canada General Insurance Co., as it combines these investment woes with regulatory and product problems.

Price inadequacy, several CEOs suggest, has become less of an issue than rising loss costs. “Our society is now, without a doubt, a litigious one,” notes Smith. There is a “compensation complex” developing, even in Canada, and insurance is viewed as a prime source of compensation, with plaintiffs’ lawyers building practices around suing insurance companies. And healthcare costs in the auto product have become the bane of the industry, adds Mayer, with insurers now paying more to “fix people than cars”. The result is that this, the supposed “year of the rebound” has turned into a resounding disappointment for insurers. “When we thought we would see the light at the end of the tunnel, we now see the tunnel is a lot longer than we thought,” comments Dussault. “The recipe to fix the problem [stricter underwriting and price increases] is not working as well as it has in the past.”

WILL IT LAST?

Insurers say that a return to underwriting discipline is needed, but brokers question, “will it last?” Smith says the hardening should last through next year at least, the only offsetting factor being the low barriers to entry for new carriers. And, Simmons notes, with no quick rebound expected from the equity markets, insurers will not have this crutch to rely for the foreseeable future.

“I don’t think we will see a return to the dizzying returns we saw [in the 1990s],” says Mayer. He sees low interest rates continuing in the near future, “and in that kind of environment we need to be disciplined underwriters.” Fragmentation will continue to be an issue, the panelists say. Simmons points to a Conning & Co. study that shows a slowdown in merger & acquisition activity. “Lack of confidence by insurers may be the biggest factor in this trend.” Mayer agrees. There is neither the confidence nor the capital to inspire much acquisition within the industry, he says. Should the equity markets return, insurers may well be swayed back into old habits. “With this temptation, especially in an industry with so many players and so much competition, we tend to fall into this trap,” notes Smith.

CAR TROUBLE

Ontario auto takes the lion’s share of the blame for insurers’ continuing struggles, with brokers feeling the effects. “It’s been impossible or next to impossible to place business,” Mayer admits. “What you’re experiencing is carriers’ reaction to the product itself.”

Insurers were, at the time of the conference, pushing for auto legislation to change the product, much of which was included in a legislative package introduced in the province at the end of October. Anticipating this legislation, insurers stressed the need for change.

There is a huge discrepancy between the performance of Ontario auto and all other business, says Simmons. The auto loss ratio nationwide is 86%, [and in comparison] 94% in Ontario, while non-auto is 68%. In a global marketplace with little tolerance for under-performance, Ontario auto is an unattractive market for capital.

Mayer disagrees, however, noting that Ontario auto remains a key market for major insurers in Canada. He sees new legislation as a means to cut claims costs, with the introduction of distinction between simple claims, such as whiplash and more complex, serious healthcare claims. Healthcare providers would also be held accountable for patient outcomes.

Dispute resolution is another focus for insurers, who see the current system as encouraging fraud. “Adjusters are faced with either challenging a claim and facing a lengthy dispute resolution process or just paying out and many are choosing to just pay out,” Mayer explains. Insurers wanted to see a “loser pays” system for arbitrations, a proposal which has been included in the new package.

These reforms are not about reducing benefits, but introducing accountability, says Cooke. Nonetheless, he notes, even with these changes, insurers are facing rate inadequacy of about 20% in the Ontario auto market. Insurers have been pushing for Ontario to institute a “file and use” rate system as in other provinces. “It’s not that I’ve ever had a rate application turned down, it’s that it takes 18 months and costs $75,000 to get one approved,” he laments. This combines with the “take all comers” rule insurers face in auto legislation to provide a very costly environment with little flexibility, the CEOs say.

SOLVENCY ISSUES

Another major concern for brokers is insurer solvency in light of the collapse of Markham General Insurance Co. and Canadian Millers Mutual in the past year. With seven or eight of the top 20 insurers falling below federal testing guidelines for minimum capital requirements, Cooke says it is quite possible the industry could see another failure. “It is unrealistic to think there won’t be some consolidation and some failure in the next 18 months.” Both he and Mayer called for prudential regulation to be made the domain of the Office of the Superintendent of Financial Institutions (OSFI) rather than provincial regulators. “If you look at recent failures, they’ve not been federal ones,” says Cooke. Mayer adds, “Regulation between the federal and provincial levels is night and day…the provincial guys don’t get it.”

PORTAL STAND-OFF

Not the least of broker concerns is insurers’ seeming reluctance to move full-force onto the CSIO portal. CEOs suggest they want to participate, but most seem to be looking to “Phase II participation”, rather than joining now, while the portal is in its initial phase. This heel-dragging could threaten the project.

“I still have concerns about the rate at which the portal can be introduced. I hope it will be quickly because if it’s not, it puts a great deal of stress on the broker,” says Cooke. And, he adds, “if take-up is slow, this will fall apart before it gets off the mark”. Mayer says his company is looking at full participation in the third quarter of 2003, but encourages companies not to lose sight of the goal, despite delays. He fears if the portal is not successful, Canadian insurers will be at the mercy of third-party vendors such as is the case in the U.K. “We own it [the portal] collectively… I don’t want that efficiency charged out to a third-party.”