Atlantic Woes, a broker perspective

As brokers, it is our job to face the public every day and counsel them on insurance matters such as risk management, coverages and premiums. In this hard market, our role has been expanded to “financial and anger management councilors”. This is a role for which we are ill prepared, and the results are feelings of anxiety and pressure being felt by all brokers, especially front line staff.

The truth of the matter is the coming of the hard market was inevitable with or without the disastrous events of 9/11, although this single event brought immediate focus to the problem and moved the process along at lightening speed. Ironically, the events of 9/11 have been a “double edged sword” for the industry as it reduced capacity and increased costs but prepared clients for premium hikes and help soften the blow especially for some commercial clients. Poor performance of the equity markets, increase in severity of claims being paid, world events affecting the profitability and capacity of reinsurance markets, etc. are all contributing to the current market condition.

However, as brokers, we have to question the wisdom of the insurance companies and their ability to anticipate this market correction and indeed better prepare for its arrival. Did insurance company executives think that the “bull” equity markets would last forever and continue to hide underwriting sins? Interest rates have been moving downward for a number of years. Was not this a good indication of the direction of investment returns, despite the blip provided by the tech stock frenzy? Did insurance company executives think that the litigious nature of the U.S. market, which is now evident in Ontario, would not reach Atlantic Canada? Did brokers not complain that premiums were too low on many classes of business and needed to be managed upward to help offset claims which were deteriorating.

WARNING UNHEEDED

In Atlantic Canada, a number of these warning signals appeared to have been ignored. Another important contributor to the problems in Atlantic Canada was the race to build marketshare. However, due to the relatively stagnant population growth, especially in the preferred underwriting areas, the only way companies could grow was to “buy the business”. This meant increasing coverages and reducing or maintaining premium levels. Well, the chicken has come home to roost on this strategy in a big way.

Now, as much as I would like to blame the entire situation on the insurance companies, I can not do so in all good faith. Brokers have added to the problem by continuing to sell “price” and use this as our only competitive weapon. We pushed companies to drop premiums, especially on commercial business to ridiculous levels, and to encourage “throwing” in coverages which inevitability added up to underwriting losses. We also played our main bargaining card (our book of business) as frequently as possible to convince companies to offer “sweetheart incentives” that added significant additional costs to an already weakening income statement.

In addition, the consumer has become more “insurance savvy”, and has started to read and understand the broad policy wordings (a “no, no”) and how they could be used to their financial advantage. This was further complicated by the legal community recognizing there was a great living to be made by using the current weak laws to help injured and in some cases uninjured parties maximize insurance benefits. Put all these points together and you get the insurance industry in Atlantic Canada producing results in excess of a 110% combined ratio with companies left scrambling to increase premiums at a breakneck pace and aggressively lobbying government to make wholesale changes to the way the act is administered.

COST OF “EUPHORIA”

So, what are the results of the last number of years of “euphoria”, and how are they affecting us as brokers in Atlantic Canada today? From my perspective, a number of significant issues have emerged. These are:

Loss of markets through consolidation or exiting of the marketplace;

Broker ability to maintain/satisfy our existing markets;

Significant underwriting restrictions in the region, especially certain areas;

The additional work load and tight time frames that is placed on brokerages to facilitate renewals;

Client loyalty is under attack as clients “shop” the premium increases.

Overall loss of capacity in the marketplace;

Class underwriting as opposed to risk underwriting;

The “book” is the law, and few company people have authority or dare make exceptions.

The inability to make common sense decisions;

Continued lack of profitability in Atlantic Canada, resulting in additional loss of market;

Frustration levels with brokerage staff is at an all time high as they try to explain the market situation and justify the sudden large increases coupled with reduction in coverages/increase in deductibles;

Amount of investment required in technology, training and growth;

Total loss of creditability by all stakeholders in the industry with the public;

The time delays in company processing of work and the service issues this causes;

The “across the board” treatment of brokers despite volume and profitability.

Bob Dylan sings, “The times they are a changing”. Was he singing about the insurance industry? Because Dylan’s sentiments seem to exactly summarize the issues before brokers in Atlantic Canada. Basically, brokers have become managers of “change” as we race down the “insurance highway” – with the sign posts being barely recognizable in the rush. But, if we slowed down, we would read the messages, “mergers & acquisitions”, “Y2K”, “9/11”, “insurance portals”, and now, “rate increases”. Let us hope that the next sign does not read: “Bridge out, train wreck”.

As you can see, the list of broker concerns is long, and each issue has a direct effect on how we do business and thereby provide clients with a competitive product in a profitable manner. In other words, our ability to survive is a concern despite increased commission levels. The issues have to be dealt with in a collaborative way working with our company partners to preserve and maintain the independent broker model.

MOTHER’S WISDOM

My mother always told me never to criticize unless you can offer some suggestions for improvement. I would suggest companies have to take a longer-term perspective on the current situation. This is an evolution not a revolution, and the problem that has taken 10-plus years to evolve is very difficult to remedy in 6 months to a year.

In Atlantic Canada, there has to be some government reform that allows companies to defend themselves against fraudulent claims, but at the same time insurers have to take a stand on dealing with the legal profession and send the message out that frivolous suits will be vigorously defended, despite the cost. Make the legal profession responsible should they bring forward opportunistic claims.

Also, a concerted effort has to be made to reduce the percentage amount a lawyer can charge on retainer if not eliminate the process all together. Claims are the reason people purchase our product and it is the single best way we can prove our value. While companies for the most part do a pretty good job servicing claims, with guidelines that they follow, brokers have to utilize claims as an opportunity to service their clients and develop their own service guidelines in this area.

Companies will have to address the current coverages offered, and possibly get back to a “menu approach” to coverage rather than the current “package policy”. This applies in both commercial and personal lines. In this marketplace not all brokers, similar to insurers, are going to survive. Companies have to reassess their current broker relationships, pick their broker partners carefully, and then invest as a team in the tools (technology, training, CRM) necessary to ensure that both parties grow profitability together. The “master/servant relationship” which seems to be in place at the moment between insurers and brokers simply does not have a long term future .

As a broker in Atlantic Canada, I am committed to helping develop a marketplace that promotes the independent broker model as well as an environment that allows the insurance community to prosper. We need to push together through our respective representative bodies to get needed product reform and restore lost creditability in the marketplace. As an industry, we have to implement premium increases and product changes in a more consistent basis.