Can the Customer Survive?

With the economic recession beginning to eat away at the operating margins of Canadian commerce across all sectors, coupled with the anticipated hike in insurance prices that businesses face for 2002, one of the biggest and immediate challenges facing commercial brokers in Canada is whether or not their clients will survive these building cost pressures, says Tracy McLean, the incoming president of the Toronto Insurance Conference (TIC). The TIC represents the largest number of both national and regional commercial brokers in Canada, McLean notes, and in this respect the different tiers that make up the organization’s membership are confronted by their own unique challenges arising from a hardening price market. However, the common business denominator driving the commercial brokerage sector remains “customer relations”, she observes, and those firms with strong client relations will benefit from the firming price cycle.

Tracy McLean, who will take over as president of the commercial broker organization the Toronto Insurance Conference (TIC) in March of next year, believes that a “hard insurance market” is beneficial to brokers who know their business and know their clients. “A hard market is very good for a broker, as it comes down to customer relations. Brokers with strong relationships maintain high retention levels during a hard market cycle. This is when the services and value of the broker comes through.”

McLean, who will be the third female president of the TIC, notes with a hint of irony that the market conditions prevailing during her presidency of the TIC are very similar to the period when her father, Fred McLean, served as the organization’s president in 1993. In the April 1993 issue of CU, the magazine profiled Fred McLean under the headline, “Stressed and Strained, squeezed by rate reductions and slow economic growth, besieged Toronto Insurance Conference brokers grapple with a stark market reality — too many chasing the same premium dollar”. The difference of the current market, particularly post September 11, is that commercial premium rates are definitely not about to fall, she adds.

Describing Fred McLean as a “life role model”, Tracy notes with sadness that her father passed away on February 28, 2001 just prior to her expected presidency of the TIC. She should have taken over as president in March of this year, but due to the family tragedy and increased leadership responsibilities at her father’s firm, Moore-McLean Corp. Insurance Ltd., Tracy postponed her leadership role of the TIC board for a year.

And what a difference a year can bring, although commercial insurance pricing had been firming prior to the terrorist attacks of September 11, the market moving forward into 2002 has radically changed, she observes. Suddenly, issues such as finding adequate market capacity, particularly for smaller regional brokers, coupled with significant price increases and reduced cover options, have produced new challenges for the commercial brokerage sector.

Add to which, attention has turned to the financial security of insurers as well as their reinsurance arrangements, all of which will add to the responsibilities of brokers and their representative bodies. In this respect, McLean expects that the TIC will renew a more active role in lobbying and negotiating with insurers in the year ahead.

The lobby factor

Although the TIC primarily serves today as a “networking forum”, the organization’s founding mandate was based on providing a negotiation and communication platform between members and insurance markets. McLean notes that during the recent “soft market years” the need for active lobbying became less of a priority. The recent turn of the Canadian market, coupled with the tighter coverage conditions emerging in the marketplace after September 11, may however, prompt the TIC to adopt a more visible and active presence in negotiations between brokers and the insurance community.

Already, McLean points out, many insurers have issued notices of reduced coverage for 2002 renewals in areas such as “errors and omissions” (E&O), Internet/cyber risks, and U.S. liability exposures. Some insurers are advising that January renewals are on temporary hold while they renegotiate their reinsurance treaties.

Looking forward, the availability of capacity in the commercial insurance sector is another concern of brokers, she adds, with increased attention likely to turn to the loss ratios of the various brokerage firms. “Capacity is definitely going to be a challenge next year. The loss ratios of brokers will come under scrutiny, and portfolio transfers will probably drop off. I think most insurers are going to focus on their existing books of business.”

Facilitating capacity arrangements and providing a network to “co-broker” the placement of risks is an area where the TIC can provide meaningful support, particularly for some of the organization’s smaller member firms, McLean says.

Client perspective

While commercial rates are definitely set to rise in 2002, McLean feels that the issue of rate increases is not as simple as the “black and white” picture that insurers are painting. “In this hardening rate marketplace, insurers do need to listen to brokers more so than they have in the past in understanding that things are not ‘black and white’. Why should the customer [insured] be penalized because some companies made bad business decisions?”

In this respect, McLean believes that the impact of the adverse economy combined with the extent of insurance rate increases many insurers seem to expect could prove to be too heavy a burden for some businesses. “Can the customer survive the economy, this is going to be one of the big challenges facing brokers.” Depending on the extent of the insurance cost increase, a number of corporate insureds may also look at self-retention of risk as a means of cutting back overheads, resulting in a withdrawal of premium from the traditional insurance marketplace. This would not be beneficial to any of the parties in the risk relationship, McLean notes. Brokers can, however, provide workable solutions if insurers are willing to accept their input, she adds.

Furthermore, the events of September 11 have raised client concerns with regard to the financial strength of underwriters. This will increase the responsibility of brokers in investigating the security of markets and thereby satisfying their customers, McLean says. “The financial ratings of insurers will have an impact with certain clients. However, most will rely on their brokers to stay on top of the situation. Personally, I will be taking the ratings seriously to protect the firm’s book of business.”

IBAO relations

The TIC has a long relationship history with the Insurance Brokers Association of Ontario (IBAO), McLean notes, with the two broker bodies being the only dual representatives from the same province holding a position with the Insurance Brokers Association of Canada (IBAC).

Although the membership composition of the TIC and IBAO is almost literally split between the commercial and personal lines of business, the two bodies have worked closely on numerous projects from political lobbying to educational programs, McLean says.

Many of the TIC’s members handle both commercial and personal lines business, although the latter would represent a significantly smaller percentage of a firm’s total premiums, McLean explains. It may be advantageous in the future for the TIC and IBAO to work together on issues such as online, real-time company-to-broker technology through the Centre for Study of Insurance Operations (CSIO), as well as establishing positions on issues such as the merger between the Financial Services Commission of Ontario (FSCO) and the Ontario Securities Commission (OSC). Both the TIC and IBAO have voiced concern over the regulatory merger and have been very vocal in their support for continued self-regulation as currently administered by the Registered Insurance Brokers of Ontario (RIBO). With many of these “projects” still in play, McLean expects the TIC and IBAO will continue to enha nce relations.

Membership drive

Like the IBAO and other provincial broker associations, the TIC has suffered from falling membership as a result of consolidation within the brokerage sector. In response, the TIC is set to embark on a membership drive primarily through what McLean calls “associated membership”.

TIC membership has been limited to commercial brokerages operating from Toronto. Following the amalgamation of the city to encompass several areas into greater Toronto, the number of firms eligible for TIC membership has increased. So too has the potential for associated members, those being firms operating from surrounding areas of Toronto. Associate membership has never really been actively pursued by the TIC in gaining support numbers, McLean says, but this will likely change in the year ahead.

Many hats

“I’m used to wearing many hats,” comments McLean. This was one of the reasons why Fred McLean asked his daughter to join Moore-McLean in 1992. Tracy studied business management and had a strong streak for adventure and travel. She began working for a travel agency located in Markham, Ontario during the height of the Cold War, and through travel connections was able to see first hand many of the countries behind the Iron Curtain.

People and “human development” have always been of core interest to her, says McLean, which led her onto a position with a personnel recruitment agency specializing in the placement of insurance professionals. Armed with her background in the travel business and sales experience gained through the HR field, Fred McLean believed that Tracy would make an ideal candidate for the brokerage’s marine line of business. Today, Tracy specializes in the marine and surety lines. Commenting on the brokerage created by her father and George Moore in 1975, McLean says, “my brother Daryn and I have been left a legacy that has a strong a very bright future”.