70 Years of Insurance

When Norman Jardine published the first edition of Canadian Underwriter in 1934, “in the interests of fire and casualty insurance in Canada”, the world was a very different place. The population stood at about 10.5 million, the country was weathering the “Great Depression” with more than 1.5 million people on relief with an unemployment rate of 23%, Richard Bennett’s Conservative government led the country but the socialist movement was growing with the recent formation of the Co-operative Commonwealth Federation (CCF) in the west, and the Canadian Radio Broadcasting Commission had just begun transmissions. The TransCanada telephone system was also established, while women fought for the right to hold office on the heels of Cairine Reay Wilson becoming the first female Senator, and the Bank of Canada was just being established. In the headlines, the world welcomed the Dionne quintuplets, Babe Ruth played his last game as a Yankee, and the “trial of the century” for the kidnap and murder of the Lindbergh baby was getting underway. Claudette Colbert and Clark Gable also topped the box-office in “It Happened One Night”.

In the world of insurance, fire coverage was the largest book of business, with automobiles still a luxury rather than a necessity, British companies dominated the market, including Lloyd’s of London. Workers’ compensation was privately provided, as was auto coverage in all provinces. And, despite the country’s economic malaise, insurer results were strong. As the saying goes, “the more things change, the more they stay the same”, and many insurance headlines of the day still resonate 70 years later: agents and companies fighting over commission rates, rising litigation costs challenging underwriters, with legislators and regulators stepping into the insurance fray under the guise of consumer protection.

EARLY DAYS

Statistics for 1934 show the pre-eminence of the fire line. Fire premiums were $41.5 million that year, compared with auto at only $11.9 million. At the time, the fire loss ratio stood at 40.9%, a figure underwriters can only dream of these days, but at the time, a CU articles notes, “a ratio of 55.94% for a five years’ experience leaves little to brag about in the way of profit producing – it barely breaks even”.

Other insurance covers have disappeared from the vocabulary, such as “explosion and riot”, “forgery”, “tornado”, and “rain” – although with a loss ratio of 108.6% in 1934, it is little wonder the rain line did not last. Much was written of the volatility of risks related to weather, a phenomenon not uncommon today, although underwriters were specifically concerned about the impact of inclement weather on the upswing in aviation losses, which stood at a 64.4% loss ratio.

Despite overall strong results, the adequacy of rates was in question. In January, 1935, CU editor James Wright comments, “a considerable amount of dissatisfaction has arisen, on the grounds that in the face of competition the rates charged have been unable to be sustained. It becomes evident therefore that to some extent the questions of rate and competition are interlocked.” In fact, fire rates had been dropping steadily since the beginning of the century. The average fire policy rate in 1902 was 1.47%, falling to 1.06% in 1992, and by 1942 this had dropped to 0.66%.

The carriers of the day were from familiar company names of today, such as Lloyd’s, Pilot Insurance Co. and The Boiler Inspection and Insurance Co. of Canada. Other names of the time have disappeared or merged, including Royal Insurance Co. and Sun Insurance Office, Commercial Union Group and General Accident, Union Insurance Society of Canton, and The London & Lancashire Insurance Co. Commenting on the changes he has witnessed in his 41 years in insurance, Alea Group chief agent in Canada Pat King says the shifting landscape of mergers and acquisitions has played an important role in the industry’s development. “Many of the great, almost legendary insurance company names of the past have disappeared through mergers and acquisitions, and the general insurance industry has moved from being based mostly in Montreal to being based in Toronto.”

The loss picture in the 1930s was vastly different – most notably, each issue of CU at the time covered individual loss events, fires of note, burglaries and accidents. In August, 1935, CU recorded the burns received by one Margaret Salter of Burlington, ON while trying to apply carbolic acid to an aching tooth. A September, 1935 issue railed on the claims danger presented by women’s beauty salons, noting “even the most carefully managed beauty salons turn out a goodly number of blistered scalps, disfigured faces, burned hair, infected fingers and heads”.

But what has not changed is the industry’s concern over fraud and frivolous litigation. In 1935, then Dominion Superintendent of Insurance G.D. Finlayson observes that “in recent years there has been an increase in the number of claims bearing all the earmarks of collusion between policyholder and third party claimant”. And, in 1936, readers heard how “many of the suits for damages which clutter up the courts are brought by people who hope to get something for nothing”.

Auto began to set tongues wagging later in the 1930s when legislators looked into the issue of compulsory insurance – requiring drivers to have insurance before receiving a license. Insurers argued vehemently against the proposal, saying it would create “a deluge of irresponsible drivers”, and a “plague of racketeering ambulance-chasing lawyers”.

SHIFTING LANDSCAPE

The complexion of losses changed during the days of World War II, with automobile use in decline, but fire losses on a steady incline. In January, 1994, Canadian Underwriters’ Association president Alex Hurry notes, “Today manufacturing risks are working at top pressure and with a large proportion of inexperienced help. Discipline is not easily enforceable and safety rules are not always strictly observed. “Non essential” businesses are short of help and often “tidying up” practices are relaxed.”

At the same time, the concentration of the population was moving toward urban centers, with more than half of the 11.5 million Canadian residents in 1941 living in just four cities. Immediately following the war years, however, automobile would emerge from the shadows to dominate the insurance landscape. In 1953, auto premiums were $162.0 million, with about 3.5 million vehicles on the road. It was the first year auto premiums would surpass those of fire coverage, which counted for $146.1 million in net premiums. The auto loss ratio stood at 52.4%, and the fire ratio at 45.9%. But, some lines, including credit and surety coverage, continue to enjoy loss ratios in the single-digits.

Lloyd’s dominated the market, accounting for $20.8 million of all premiums, followed by the Royal-Liverpool Group, Western Group and Zurich General Accident & Liability.

Skip Sutherland, former president of Crawford Adjusters Canada, says when he entered the industry in 1957, claims was a very different game. “In the 1950s there was little or no telephone adjusting and there was no direct repair.” Many claims, specifically those with a small value attached, were assigned by agents/brokers to the adjuster, rather than by the insurer. Adjusters knew their local brokers and handled claims in a face-to-face manner. And because of the tort law applied to auto physical damage claims at the time, adjusters had to handle each claim hands-on to determine liability. “There were more independent adjusters in each community and closer rapport with all the claims people in a community. You got to know your competitors a lot better.”

COOPERATIVE EFFORT

1963 marks the first year net earned premiums in the industry surpassed the $1 billion mark, but this was hardly a cause for celebration. The industry was in the “down” phase of its cycle, a repeat of 1957, with net losses of almost $80 million. The industry’s loss ratio had exploded, and now stood at 71.7%.

Top companies of the day were Royal-London & Lancashire, Lloyd’s Non-Marine, Western Group, Travelers Group and Commercial General. The insurers of the day called for the creation of an industry body to try and bring about cooperative movement to rate stability. On April 8, 1964, the Insurance Bureau of Canada (IBC) held its first meeting.

At the time, there was much speculation on the part of insurers about what action governments may take to regulate the industry’s actions. J.E. Burns, president of the Independent Insurance Conference, notes in a 1964 edition of CU, “we deal with the merchandising of a social rather than material product. As such the subject of insurance is grist to the politician’s mill. This is demonstrated in the automobile field where the social problems created by the use of the automobile has resulted in provincial legislation that makes it mandatory to insure.”

In 1967-68, the Facility Association (FA) was born to fulfill the industry’s mandate to offer insurance to all drivers. Ontario Insurance Agents Association president John Kirby says in a March, 1969 issue of CU, “if this program worked effectively none but the really bad risks would find their way into the Facility and the market would be broadened by the companies themselves, accepting for their own account substantially larger portions of sub-standard business”.

Attempts by the industry to wrestle control of underwriting, specifically in the auto product, have characterized much of its history since the end of the war. Says Iain Galbraith, who joined the industry in 1957 (he retired from Allianz in 2002): “During my first five to 10 years, companies targeted for a combined ratio of 100% or less. Competition for growth eventually spawned the acceptance of 100%-plus targets, with investment portfolios looking after the profits. With the fluctuations of the financial world, this led to the continuing see-saw cycles of soft, and hard markets.”

CIRCLE GAME

Of course, it is not only personal lines auto which has experienced this sharp volatility. Commercial buyers have weathered the market throes as well, points out Tony Bridger, veteran risk manager who retired from the Bank of Montreal last year. Since moving into the risk management field in the early 1970s, Bridger has witnessed three hard market turns, and the impact those turns have had on the insurance industry. “We have seen hard markets in 1978, 1986 and 2000 and each time this occurs, risk managers look for alternatives. In 1986 approximately 30%-35% of available premium left the insurance market permanently in the race to “alternatives” like captives, reciprocals, and higher retentions,” he says. “With the latest hard market, once again risk managers are exploring the ART [alternative risk transfer] markets, taking higher retentions, and dropping economically unnecessary coverages. It is likely that history will repeat itself and we will see a further erosion of the premium base for the industry.”

The reinsurance market has also felt the impact of the cyclical nature of the business, observes King. “There has been a dramatic shift from a long-term relationship based business to one based almost exclusively on a short term opportunistic pricing model, and this has created and will continue to create unexpected but inevitable conflicts between the ceding companies and the reinsurers that happen to be on their reinsurance programs in any given year.”

Given the current market melee and with it the calls for the industry to “learn from its past” and seek stability, it is easy to think that the hard market is a new phenomenon. In 1964, Canadian Underwriters’ Association president E.A.W. Paterson wrote: “Too much emphasis has been placed, by too many, on the importance of premium income as compared with the value of sound underwriting and a relatively stable market. The fact that the seriousness of the existing situation is recognized by such a large segment of the business is a hopeful sign that a lesson has been learned and that the groundwork has been laid for the establishment of a workable pattern for an insurance operation in years to come.”

Almost 20 years later, Angus Ross, then senior vice president of Reinsurance Management Co. of Canada wrote in the June, 1982 edition of CU: “I have to question what secret succulence lurks in this market of deep unprofitable valleys and mere hillocks of profit, which edge over the horizon and appear as ephemeral as the proverbial pot of gold at the end of the rainbow.” Ross notes that between 1961 and 1981 the Canadian market had eight profitable years totaling $300 million in underwriting profit, and 13 years of losses totaling more than $2.5 billion.

Fast forward 20 years later, with Royal & SunAlliance Canada CEO Rowan Saunders writing the December, 2003 issue of CU: “Historically, the p&c insurance industry is subject to severe pricing cycles and inadequate long-term profitably. We need to break out of this cycle and consistently deliver a reasonable level of profitability – both to generate and retain sufficient capital for the industry and to avoid the market dislocations which such severe pricing cycles create.” Certainly, since the 1960s, the industry has enjoyed growth – earned premiums in 1969 were $1.8 billion, and in 2003 stood at $30.5 billion. However, while the industry perceived an auto loss ratio in the mid-to-high 60% range as unacceptable in the late 1960s, last year auto posted an overall loss ratio of almost 90%.

TECHNOLOGICAL PROMISE

Among the most salient changes impacting the insurance industry, particularly in recent history, is the technological boom. In the early years, manual typewriters were the order of the day, and Sutherland recalls that, even in the 1950s and 1960s, claims reports were being typed on “Gestetner paper” – a carbon-paper which would then be fed into a machine to produce copies.

While Gestetner would later be overshadowed by Xerox, it was the development of electronic communications which truly transformed the business. As far back as the early 1960s, electronic data processing systems were in use, and direct billing was the current movement. But, it was in the early 1970s that insurers and agents/brokers began looking into coordinated technology platforms. In 1981, the Center for Study of Insurance Operations (CSIO) was born, and at the time, proponents of technology believed computers could reduce the expense ratio from 33% to 20%.

In his 48 years in the industry, McLarens Canada chairman Stewart Ponton says electronic data has come to define much of the relationship between insurers and adjusters. “The demand for statistical data has become as important in many instances to the client, as the actual claim itself. In many instances, the client has more interest in our IT system than the expertise of our adjusters.”

In 1981, electronic mail was being piloted between insurers and brokers, and in November of that year, Kaysea Consultants achieved broker interface by rating and binding three policies in an overnight batch. Ken Clarke, president of Pictech, was with Kaysea in 1982 and says perhaps the most notable aspect of the industry’s technological progress is the hurdles it has faced. “I’m amazed that true, flexible connectivity is not a complete reality in 2004. Since the early 1980s there have been multiple attempts to try and have agent to company exchange, and we’re still looking for funding and political, corporate endorsement.” Looking back on the last 70 years in insurance, the question remains, how will the industry use its past as a learning tool for the future?