99 Canadian Insurance Congress: Marching to new Drummers

Held against the backdrop of the nation’s capital, the 1999 Canadian Insurance Congress — seen as Canada’s premier reinsurer/primary company CEO forum — offered good news to insurers and risk managers on the treaty negotiation front. This year’s reinsurance rates, which normally come up for re-negotiation between August to November, are unlikely to show much change on last year. The reason being: less than 50% of contracts will be negotiable this year as the bulk of agreements are locked into multi-year arrangements, many CEOs confirmed. However, reinsurance speakers at the congress were emphatic that, in the mid- to long-term, rates can only go up. In addition, the Congress speakers, from reinsurers, primary companies, brokers and regulators foretold of a tougher future ahead, one clearly dotted with the dangers of change — but they observed, it presents new opportunities as well.

The overall message from the 1999 Canadian Insurance Congress was that the property and casualty insurance industry has a new drummer to march to: the consumer. “We cannot escape competition,” reflects Max Furrer, CEO of Rhine Reinsurance in a reinsurance trend panel debate.

Furrer’s view was reflected by several speakers — across the industry board — in their presentations of what the immediate and long-term future may hold. Consumerism is reaching its height, they confirm, which is impacting the business of insurance from reinsurance through to primary companies, brokers, the regulatory and the trade bodies serving the industry. Convenience, ground presence, and cost-effective delivery have become key to success, they note. And, with the pressure mounting on cost containment, the pinch will be felt by both regulators and industry lobby bodies as well.

Similar to the primary company environment, reinsurance is being driven by three major trends, notes Furrer, that being consolidation, a market decline for traditional reinsurance cover, and new options opening through technology.

While the global market’s excess capacity has driven rates earthward over recent years, resulting in need for consolidation of the reinsurance sector, the subsequent outcome has been a high concentration of marketshare with a handful of players, Furrer observes. This market concentration has, in turn, aggravated the over-capacity problem by consolidating huge amounts of capital among a small group of companies in a global environment of liberal cash availability. As such, reinsurance rates are unlikely to move upward by any dramatic measure in the short to medium-term, he predicts. “But, let’s hope that common sense prevails and this excess capital is returned to shareholders.”

Of greater concern, Furrer says, is the growth of the non-traditional reinsurance market. “There is shrinking demand for traditional reinsurance as companies have become larger and are taking on higher retentions. There is also increased interest in new coverages and financial mechanisms — reinsurers as an industry need to get in touch with new non-traditional products…it’s important that we offer solutions and not just capacity.”

Meeting consumer expectations

The shift from capacity to solution providing is a remarkably untapped area for reinsurers and demands greater expansion says Serge Osouf, president of SCOR Reinsurance. He says the capital markets and alternative risk transfer vehicles have yet to gain full steam — “the financial markets have not added much capacity to the global reinsurance market” — but reinsurers must develop new services to create greater relevance should these alternatives reach greater market share levels.

Osouf says reinsurers must develop new services using their risk expertise, with an eye on holistic risk mitigation, as oppose to straight cover. “Reinsurers have a global team of experts with knowledge in all areas of risk. We have the ability to move into the risk mitigation market and expand our scope of products.” With the market focus changing from product to customer, Osouf observes, the next ten years will likely see a trend towards combining reinsurance and banking partnerships.

Toby Stubbs, a reinsurance underwriter with Wellington Underwriting, advocates the industry use its trend data to provide real risk mitigation services to insureds. With cat losses on the rise, corporate customers would benefit from this information. “With cat losses being unstable and rising over the past few years, this is an area that reinsurers can develop loss mitigation programs for its customers,” he says. Significant advances in weather modeling technology gives reinsurers an upper hand when offering knowledge based services to its clients, he adds.

The clock is ticking though on offering these innovations, notes Herbert Haag, president of Partner Re Ltd. He says the convergence of alternative risk transfer and capital market vehicles is ongoing, but the onslaught will not truly begin until the first major capital market loss. “We won’t know until then just how big an appetite investors have for risk,” he says. If investors come out of the first loss relatively unscathed, expect these alternatives to become serious competitors for corporate marketshare.

To the industry’s credit, Haag remarks, multi-year contracts and multi-line protection has emerged as a customer-focused trend. Also, cat loss cover has become aggregate per year and not per event. A few twists on traditional policies showing reinsurers are serious about maintaining their marketshare.

Still, Haag echoes Furrer’s warning about careful underwriting. Regulators worldwide look disparagingly on the Bermuda captive market. “If one market participant in Bermuda defaults, it will put all of the captive companies there under domestic scrutiny,” he says.

Regulatory shuffle

Reinsurers are not the only concern facing the industry, delegates were told at a session examining regulatory roadblocks. Financial Services Commission of Ontario (FSCO) superintendent Dina Palozzi and Office of Superintendent of Financial Institutions regulator John Palmer told the congress there are crucial regulatory issues to be clarified surrounding the government’s release of its white paper on financial institutions.

Palmer says both regulators and government have their work cut out for them in identifying and preventing tied-selling in financial services. He concedes enforcing the anti-coercion provisions is difficult for regulators who need a clearer definition to actually identify when it is being practiced. Unless consumers come forward upon being coerced, the tactic is virtually impossible to govern. “How do you enforce the provisions when these practices are so widespread and used so broadly”, Palmer asks. Adding to the regulatory complexity, Palozzi notes, is regulatory lack of clarity regarding the practice of tied selling between banks and their insurance subsidiary.

Another issue that is sure to heat up is access by insurers to financial payment systems. Terry Squire, president of Co-operators General Insurance Company, stood up during the regulators forum and pointed out that insurers missed the boat by not lobbying strongly for more access — without bank service charges — to automated teller machines, cheque clearing authority and other payment related services. In response, Palmer says the federal government will exercise extreme caution to any opening up of access to the payment systems, inferring insurers might not win the battle this time. “With the rise of virtual companies — who outsource many main functions — consumers are in the position of not knowing exactly who they are dealing with. A dramatic opening of payment systems could become problematic. For example, Microsoft becoming a financial provider is a nightmare for all of the financial institutions,” Palmer insists.

The distribution debate

In the first of a two-part discussion on the strategic importance of distribution in insurance, Ted Belton issued a challenge to property & casualty brokers to adopt a more progressive attitude to new consumer-driven delivery options.

Lack of inn ovation by brokers in addressing consumer expectations, he adds, is creating demand for alternative distribution mechanisms such as direct writers and the financial service networks. Belton observes that, confronted by competition, brokers have responded in an outraged manner as though distribution in insurance is their sole right. “Brokers don’t realize consumers want the option to do business in other ways, they have lost touch with the way goods are delivered.”

As evidence, Belton points to the rising marketshare of direct writers, which rose from 12% to 20% between 1994 and 1997, and that insurers have spent far too much time placating brokers, treating the distribution arm as consumers and not as intermediaries. “When insurers continually treat brokers as the customer, they are ignoring their real consumers and losing ground in the market,” he notes.

At the second part of the distribution discussion, brokers responded to Belton’s challenge.

Laird Laundy, vice president of broker consolidator Equisure Financial, says Belton has improperly gauged the public which wants competitive pricing but with the personal broker interaction. “If anyone thinks that consumers are only worried about price and not service, you are undermining the value brokers bring to the general public.” Laundy issued a challenge of his own, “we have nothing to fear from the banks…we’ll kick Royal’s bureaucratic flabby ass,” as broker delegates cheered.

Insurance Brokers Association of Canada president-elect Jim Ball, president of Reliance Insurance Agencies, diplomatically addressed Belton’s assertions. He says IBAC polls have found 6.7 out of 10 consumers prefer the broker model to call centres and direct writers. “Many models are evolving but success depends on the acumen of the participants,” he says.

Ball says recent efforts by insurers to produce television and print advertising promoting brand awareness should shock brokers into action. “Insurers are branding more, hopefully this will translate into brokers recognizing the need to (continue support for the bipper program),” he suggests.