Canada’s Insurance Market: A Silver Lining

On the back of rate increases and a firm hand on underwriting, insurers and reinsurers posted a strong comeback in 2003. But, representatives of the commercial brokerage, insurance and reinsurance communities speaking at the second annual “Professional Development Day”, sponsored by the Ontario Risk & Insurance Management Society (ORIMS), says there is still much uncertainty in the marketplace facing commercial insurance buyers.

The “silver lining” of 2003’s performance by insurers is tempered by persistent issues still threatening the financial integrity of markets. While Canadian, U.S. and London market carriers posted strong financial results last year, rating agencies warn that rating downgrades will continue to outpace rating upgrades in 2004, notes Ken Arthurs of Marsh Canada. Lingering issues include the inability to reach reforms for the U.S. tort crisis (including asbestos litigation) as well as the shadow of industry under-reserving. Reserving is “the big unanswered question”, Arthurs stresses. Commercial clients continue to wonder if reserves are being assessed accurately and if further reserve charges may follow on those already seen in the past three years.

Building on 2003’s financial success, insurers expect to gain further ground in 2004, and their commercial clients are beginning to see the light at the end of the tunnel in the form of rate decreases. Many lines are seeing flat pricing on renewal, or even decreases in the first quarter of this year, Arthurs explains (see chart 1). One business line not being spared is fiduciary, where first quarter rate increases were in the range of 70%. “Fiduciary was that little cover you had that was about $10,000. Today, it is one of those coverage lines really hit hard because of un-funded pension liabilities [in the U.S.],” he observes.

A problem faced by commercial buyers and their carriers is these risks “come from left field”. The question remains, what will follow on the heels of asbestos or pension holder lawsuits? As well, the forecasts for strong insurer growth in 2004 are dependent on the absence of another terrorist attack or a natural disaster on the level of Hurricane Andrew, events which cannot be foreseen.

Arthurs expects insurers to protect their existing books, not willing to give in to large rate decreases or by loosening terms and conditions. Nonetheless, “there are potential savings out there that were not there in the last two years for certain markets, certain industries, certain risks,” he adds.

While high-risk industries such as technology and healthcare will not likely see better rates as a result of shopping around, other good risks may. But even these good risks face little insurer flexibility on terms, deductibles or coverage levels, and will still be expected to come early to market with full information. This picture could change moving into the last half of the year, Arthurs notes. “Insurers have given themselves huge growth targets this year”, he says, somewhere between the order of 15-30%, which leaves him to wonder if there will be a “premium grab” in the third and fourth quarters of 2004 if those targets are not being met. As well, if interest rates rise, will insurers want increased cash-flow from premiums?

THORNY ISSUE

In the reinsurance sector, the picture is much the same. “Things are slowly improving, but we are not out of the woods yet,” says Pierre Dionne of CCR. Canadian reinsurers fared well last year, with a combined ratio of 96.4% versus 110.2% for 2002 – their best result in 12 years. Also, Dionne was surprised to see strong investment income of $6.2 million result from last year’s numbers.

While Canadian reinsurers did not post the same kind of reserves as their U.S. counterparts because they did not face the specter of asbestos liability, they will likely have to make adjustments before the end of this year on the heels of their own prior year loss issues. As such, auto exposure remains the thorn in the side of reinsurers and their cedants. Renewal trends for January 2004 show the unwillingness of reinsurers to approach this line of business, even as they warm up to other risks (see Chart 2). As well, the investment picture remains unclear, Dionne adds. “For North American reinsurers, the big problem is the low interest rate environment. All our old bonds yielding good rates are maturing and we are buying new bonds with lower rates. That’s going to be around for several years.”

Three companies left Canada last year, Dionne observes in pointing out that their position has been replaced by three new entrants. With new markets, he predicts growing interest in liability lines as well as property risks moving forward.

CHANGING WAYS

Commercial buyers say their concern is that the harsh “swings of the market” will continue unabated, and that the market crises they faced these past two and a half years will be repeated. Just as auto insurance consumers have balked at stiff rate increases, commercial clients face the potential for rate declines with distaste, fearing they will lead to market upheaval.

As a result, the insurance industry needs to address how it is going to deal with the next market swing, says Jane Voll, chief economist for the Insurance Bureau of Canada (IBC). Just as the industry faces a tarnished public image as a result of the auto melee, it also has to look at market availability for commercial clients. For example, the bureau is currently talking with volunteer organizations facing a dearth in the liability coverage market. The industry needs a long-term strategy to temper its cyclical nature, she stresses. At the same time, insurers need to temper their results or face the wrath of shareholders. “We’re not sure if we’ll be able to ensure stable, adequate ROE due to regulation of the industry and other factors,” she adds.

Part of the problem, Voll says, is trying to push insurance issues to the front-burner of the government’s agenda when they are not making front-page news. “If it’s not on their [legislators’] immediate policy agenda, you may not get their attention.”

Speakers agree that the insurance industry also needs a long-term communications strategy, knowing that at some point in the future the price and availability of insurance will become an issue for clients, both in commercial and personal lines. Insurer and reinsurer CEOs also have to back up the messages they have been sending out in recent months, about the need for responsible underwriting to continue even in the face of competitive forces.

Prices can soften to a degree, as long as they remain above technically adequate levels, Dionne comments. The message from global parent companies is “we don’t care about the top-line [premium growth], we want a profit,” he explains. “There are lines we cannot cross”.