A Twister, Turner

Almost a year ago I attended the International Insurance Association (IIA) annual conference, which took place in Vienna, Austria. During the course of this business trip, I managed to sneak in a “city tour” of the city, which included a stop at the world-famous Prater amusement park.

After having taken in the obvious sights, such as the “Big Wheel”, I came across this weird-looking roller-coaster ride with more convoluted twists and turns than thought possible. Having not done anything as impromptu in many years, I thought, “what the hell, why not”.

As expected, the ride was full of spins, turns and excited yelps from fellow passengers. However, as the car began to slow down on the tracks on what appeared to be the final upturn, it became obvious that there was no further track on the opposite downside… Which meant that the car could only go one way – the way back that it had come. I had been fully prepared for the forward motion, but now rushing backwards through the same twists and turns at G-force and trying to keep my stomach in place due to disorientation of this weird motion, all I could think was “what kind of sadist would design something like this?” The real question I should have asked myself, is what kind of an idiot would voluntarily subject themself to something like this. The same could be said for property and casualty insurers. The industry hurtled downward through many twists and turns over recent years, with each company being fully aware of the ride they were in for. Now, with the ride appearing to be at its end, the same acceleration is re-occurring, but this time in the opposite direction. Is this wild swing upward any less precarious than the downward rush? Some call it the “turning of the cycle”, while others see it as a pointless act of “lemming-like stupidity”. Either way, a sharp turn in the market cycle in either direction produces volatility and add-on risks such as negative customer perceptions when prices appear to be rising disproportionately. Also, as witnessed by the recent withdrawal of Markham General, the sudden “downs” and “ups” do have their casualties.

The withdrawal of insurers from certain lines and regions has also roused widespread concern, in the public through the media, as well as with politicians as consumer groups and business lobby groups begin grumbling. The cancellation of popular public events and festivities such as the London Airshow due to what appears to the public to be unfair pricing demands made by insurers can also but only add to the industry’s poor reputation for fairness (see Insight of this issue for further details).

And, when millions of dollars in cover is left hanging out in the breeze with policyholders scuttling for insurance during the midst of their policy term, as in the Markham situation, then regulators begin applying a heavy hand – just when the industry had hopes for a more deregulated environment.

As indicated by risk managers at the recently held Risk and Insurance Management Society (RIMS) annual conference (see RIMS article in this issue), the dramatic turn in insurance pricing could also threaten a significant withdrawal of premiums from the traditional underwriting marketplace (akin to the liability crisis of the mid-1980s). Okay, prices are going up, but is the manner healthy? Will the latest price recovery prevent insurers from getting onboard the next roller-coaster? History would say “no” to both questions.

As the industry crawls out of its downswing (which the first quarter 2002 returns collected by the Insurance Bureau of Canada would suggest is occurring), there will be tough marketing challenges facing insurers as eventually market forces balance out the wild swings in pricing. Of course, as prices settle back, premiums do come back into the market, but each time the pool is that much smaller in real terms as risk dollars are lost to the capital markets and the balmy climes of captives.

The IBC and several of the provincial independent broker associations have already formed joint monitoring committees to evaluate the reduction in market capacity caused by the latest price upturn. The hardest hit appears to be New Brunswick where in certain regions cover is simply unattainable. Ontario is also under the spotlight, confirms the IBC’s president Stan Griffin, with the withdrawal of Markham General having left about $80 million in cover “out on the street”. At this point, the reduction in markets in Ontario is not at a critical stage, says Griffin, but the situation is being monitored closely. And, with several insurers such as Kingsway Financial Services and Pembridge threatening to withdraw from the Ontario market unless the provincial regulator agrees to a timely approval of rate adjustments, then there could indeed be a crises.

Quiet clearly, there needs to be change in the regulatory environment applying to the industry as well as the thinking of insurers if future financial trauma is to be avoided. In the meantime, as the IBC’s chief economist Paul Kovacs observes, “it is an immediate priority to re-establish healthy earnings, but this journey will take a long time”