Cover Story: Broker, Insurer Relations: Under Pressure

How much is too much, and what will the breaking point be? That is the question being asked of consumer response to the current hardening insurance market. While customers are willing to accept a certain level of increase, attributing this to September 11 losses whether accurately or not, it remains to be seen just how much more they will take.

Insurers, on the other hand, warn that this is just the beginning, and consumers should brace themselves for at least two years of increases as the industry claws its way back to profitability.

Meanwhile brokers, caught in the middle, are juggling the knowledge that insurers must and will institute price increases with consumer expectations. As Alan Jones, president of the Independent Insurance Brokers of Alberta Association (IIBAA), says, “I feel like I’m becoming a professional explainer”.

East coast storm

No where is the situation more desperate for brokers than on the east coast. In New Brunswick in particular, market availability is at a near crisis level. Insurance Brokers Association of New Brunswick (IBANB) president Mike Daniel says the association’s executive has been traveling to Toronto, talking to insurers at their head offices to “plead with them to stay in the province”.

“My main concern is market capacity,” he admits, and it is outweighing even the massive price increases that are giving consumers fits. “Clients are screaming bloody murder with the price increases they’re seeing. [However] if they get a renewal, that’s great. In some places they can’t even get a renewal.”

While brokers across the province are struggling, and all lines are to some degree affected by price firming and reduced market capacity, the biggest headache remains personal auto. In some cases, the only market open to brokers is the Facility Association (the industry pool for high-risk drivers, intended only as an insurer of last resort). At this point, even the title “independent broker” comes into question, with market withdrawal leaving brokers no choice to offer their clients at all. “We have brokers out there who aren’t brokers anymore,” Daniel surmises.

Brokers do understand insurer concerns, he adds. Loss ratios in auto are “terrible”, with the main burden being non-economic loss from bodily injury claims. These cases are sometimes dragging out for months, even years, leading to escalating healthcare costs for insurers. “We’d like to give answers to the companies, we’d like to give answers to the consumer,” Daniel says. But answers are in short supply as all parties await the report of New Brunswick’s select committee looking at auto insurance issues. There are a lot of “what ifs” where the report is concerned, including what the impact of a potential upcoming election could be, and even should reforms be recommended, how long it would take to push them into legislation.

However, Daniel notes that one change could be made without a change in legislation that would provide insurers with some relief. If the government would “open up the territories” and allow insurers to underwrite third-party liability on a regional basis to reflect loss experience, this would at least be a place to start in making New Brunswick a more attractive place to write business. The association is also doing its part, with CrimeStoppers, to convince residents to report insurance fraud, a significant issue in the province.

Legislative reviews are also ongoing in other Atlantic provinces, and a heated debate is shaping up in Nova Scotia, with the Insurance Bureau of Canada (IBC) pushing for easier rate filing and stressing how hard insurers have been hit by soft tissue injury claims. They recently won one stage when an independent actuarial review sent to the province’s Utilities Review Board cited inadequate rates. The URB will soon begin hearings on auto insurance issues. “Things are pretty tight,” says Matthew Trask, chair of the Insurance Brokers Association of Nova Scotia (IBANS). Consumers are seeing increases of about 20% on personal lines and around 25% on commercial. But “it’s getting to where rate is less of an issue as opposed to being able to find capacity”.

A recent survey of member brokers showed that in both personal and commercial lines, capacity was scarce. 75% of brokers had a commercial prospect but no capacity to offer, and on auto, slightly more than half of the brokers report having a risk dropped “for no apparent reason”, reports IBANS executive director Stephen Greene. “In the view of our members, all of the companies are giving them capacity restrictions.” Some brokers have dropped from five companies to three, and at least one broker dropped down to only one market. “Strictly speaking, that means you’re no longer a broker,” he observes.

Trask says that despite the high profile nature of the auto debate, commercial capacity is as bad or worse a dilemma. Some companies are no longer underwriting the risk, but pulling out altogether. “It’s a frustration,” he says. He wonders if auto issues are addressed, perhaps companies will be willing to direct more capacity to commercial lines as well. Brokers do understand the challenges facing insurers, says Greene. “We don’t dispute the evidence presented by the IBC and so we don’t dispute the need for higher rates.” However, he adds, “we think rate increases could have been spaced out better…it’s as if they are trying to make up for seven or eight years of losses in one year.”

Quebec concerns

In Quebec, losses have not been an issue, but market availability remains something of a challenge nonetheless. “We don’t have too many broker insurers, maybe six or seven, writing personal lines,” says Georges Biron, president of the Regroupement des Cabinets de Courtage d’Assurance du Quebec (RCCAQ).

Insurer reluctance to write through Quebec brokers is a bit mystifying as it represents the most successful market in Canada at the moment. “It’s not like the Maritime provinces where the experience has been terrible, it’s a good place to write business. In our case, it’s not because of experience or loss ratios…it may just be a language barrier.” He wonders if insurers are not fearful of the expense of working in a largely French-speaking market. However, Biron is hopeful that the Centre for Study of Insurance Operations (CSIO) portal may help bridge this gap by making language less of an issue.

Other issues the association will be tackling are the fight against the first refusal clause in standard agency contracts, which gives the insurer 30 days to match any offer made by a potential buyer. Also, they will fight for broker access to the central file on accident records for drivers. Right now, access is restricted to insurers, direct writers and exclusive alliance brokers, but Biron says all brokers need access to this information to offer appropriate quotations. “We want the same flexibility as others have, especially direct writers,” he says. “We have a chance to win on this one,” he adds, as the government seems to be listening to their arguments. RCCAQ will also continue its “watch dog” role, monitoring the creation of a Quebec super-regulator to ensure that a level playing-field is maintained for insurance distribution.

Ontario auto blues

Ontario may not be suffering to the extent of the Atlantic provinces, but market availability has become a real concern here with the failure of Markham General and Canadian Millers Mutual, the withdrawal of Lloyd’s from personal lines, and the transfer of books of business from Zurich to ING and CGU to Pilot. It is estimated that the result of these moves was that about $350-$500 million in business was “left on the street”, says Danny Craig, president of the Insurance Brokers Association of Ontario (IBAO). Although much of this business has been taken up in bits and pieces, some brokers were forced to tell clients to go elsewhere for coverage.

Craig notes that he was aware of one broker who started the year with Markham, CGU, Lloyd’s and Pilot. “That looked like a pretty good book.” Now that broker is down to just one market, Pilot. “We don’t have the capacity to lose a nymore major players,” he says. Both he and president-elect Jim Hawryluk, who takes office at the end of the year, say that brokers are backing insurers in their attempt to reform Ontario auto (see Profile, of this issue). “No one [insurers] wants to take books [of business] until there is product reform,” Craig comments.

Insurers are putting their hopes in a private members’ bill, Bill-166, put forward by MPP Rob Sampson. The bill proposes reforms including a file and use rate system and personal injury tort reform. The IBAO “totally agreed” with the IBC’s submission to the committee looking into the bill. “If Bill-166 doesn’t go through, it’s going to be tough to get any of the companies to step up and say we’re open for business,” he says. “We need the product changed so they can get the returns.

Craig is optimistic that there is support in the legislature for the reforms. “The government realizes it is critical to the industry to get this bill through. I believe there is understanding in the legislature.” A key will be to get the reforms through quickly for two reasons: to show global insurers that Ontario is an attractive market heading into 2003 and to avoid getting hung up in the expected election.

Brokers also need to do a better job of educating consumers on just what bad shape insurers are in financially, Craig adds. “We have to teach them why things are the way they are.” This job will become even more difficult as the hard market progresses, he notes. “The consumer, this year, has been willing to accept these increases [largely because of media attention on insurance in the wake of September 11]. If we come back next year [with more increases], it could become a political issue.”

Western waiting game

In the one private auto market in the west, Alberta, the situation is less critical, but rate hardening is still an issue. “We’re not immune to the rate increases,” says Harold Baker, executive director of the Independent Insurance brokers Association of Alberta (IIBAA). “The long and short of it is we’re concerned about the adverse effect it’s going to have on consumers. We’re also aware that in some cases it’s warranted. It’s a bit of a Catch-22.”

He says the association has had media inquiries based on growing consumer concern. And rates are also up on commercial lines, especially in lines that are seen as high risk, such as oil and energy.

The association is discussing the effect low-impact collisions are having on claims costs. “We haven’t come up with any magical solutions,” he says.”[But] you question how much of a settlement is being made on vehicle damage of $150 where we are seeing medical claims in the thousands.” Despite government reform, this issue has been persistent. As a result, Jones says he hopes to see insurers take action, rather than merely paying out on these low-impact bodily injury claims. “We’d like to see the insurance companies challenge more people on it.”

In the provinces with public auto insurance, change seems to be on the horizon, but happening at a snail’s pace. In Saskatchewan, broker discontent with Saskatchewan Government Insurance (SGI) is being heard over the introduction of an opt-out system for no-fault coverage. The Insurance Brokers Association of Saskatchewan (IBAS) had hoped to work with SGI to educate consumers, but found SGI’s information was biased in favor of the public insurer, says the association’s president, Bill Schwandt. He says insurers are also struggling with the new program, unsure of how to write the policies. “So far insurers are saying ‘we’ll do what SGI’s doing and hope their numbers are right.” But this may not be the case as SGI has estimated just 10% of drivers would opt-out, and preliminary estimates show as many as 25% could. “If it’s 25%, these companies are going to drastically have to change their underwriting.”

In the end, what was intended to offer consumers additional choice may not do so if insurers do not write the coverage, says Schwandt. He thinks the government’s social agenda is not met by handing over the optional coverage. “We lean towards the view that the government should take care of the people and let us take care of the tin.” He adds that actions by SGI such as reducing the value cap on light commercial vehicle coverage, a line where private insurers were actually making money, shows an unwillingness to open up the market, and cramp the ability of insurers to make capacity available in the marketplace. “They [SGI] have done things that make you think they want to corner the market.” Given this, he says, “we’ve been lucky there is as much market as there is.”

In British Columbia, insurers and brokers have been playing the waiting game for more than two years, with delay after delay of the new provincial government’s much anticipated “core services review” of state-owned enterprises. Depending on the direction taken in the core review, B.C.’s auto insurance market could be privatized. However, it may be too late in the current government’s mandate to institute first-dollar competition in auto, notes Don Ungaro, president of the Insurance Brokers Association of B.C. (IBABC). He says the association is not opposed to privatization, but does have concerns over its implementation. The message IBABC has put forward to the government is “just be sure you’re doing it properly, because it [auto insurance] is a mess elsewhere.” He also wonders whether the markets will be there for B.C. auto given the lack of availability elsewhere, and if insurers do invest in B.C., if this will worsen the situation in other provinces.

The association is also involved in discussions on the province’s Financial Institutions Act, where the biggest concern is to prevent banks and credit unions from retailing insurance through their branches. Brokers are also adamant about maintaining the ban on rebating and coercive tied-selling and keeping licensing functions in broker offices. Ungaro is optimistic about the process. “So far, it seems they [the government] are listening to us.”