Cover Story: Showdown at Sundown – Brokers and the hardening price market

By the end of last year, personal auto premium rates in the U.S. had risen on average by 6.3% on a quarterly basis compared with a year ago, while personal home rates rose by 10.6% over the same period, according to a broker/agent survey conducted by Fox Pitt, Kelton Inc. and Conning & Co. The survey suggests that under-performing lines of business, of which personal auto and homeowners were highlighted, will receive further double-digit rate increases during 2002.

Canadian brokers CU spoke to point out that double-digit rate adjustments to personal lines auto and homeowners’ covers had been well in place before the end of last year, with many regional broker responses indicating that the price corrections thus far implemented this year have been in the 20%-plus range. However, brokers seem less concerned with the rate increases demanded by insurers as opposed to the restrictions being placed on coverage and the sudden decline in market capacity. Ontario and Atlantic Canada appear to have drawn the most attention from insurers as auto bodily injury claim costs continue to spiral to new heights.

“I don’t see this hardening cycle of the market to be much different to past hard markets,” comments Ted Belton, an industry analyst and author of the “Belton Report”. Typically, a hard market produces rate increases and reduced capacity, he adds, which places pressure on the revenue and margins of brokers. However, Belton concedes that the current price firming could prove more extreme than past cyclical shifts. Notably, large brokerages usually benefit from higher commission earnings during a hard market, he observes, “but feedback suggests that even some of these larger brokerages are now having a problem placing new business”.

As such, Belton believes that the current cycle could well ripple into a new wave of broker consolidation, with smaller independents forced to look at either selling out to network operators or joining “cluster” alliances. “The deeper we get into the hard market, the more I expect that this [broker consolidation] will become evident.”

With little question to the fact that this is indeed a “seller’s and not a buyer’s market”, independent brokers acknowledge that they are facing challenging conditions. So, how are independent brokers across the country dealing with this volatile and tight market environment? CU spoke to the provincial broker associations to gauge member feedback.

Public “pro-action”

The issue foremost in the mind of the Insurance Brokers Association of Canada (IBAC) is to communicate to the buying public that brokers are out there to protect their interests, says the association’s executive director, Brendan Wycks. In addition to producing inhouse public marketing/information materials delivering this message, as well as explaining the need for rate adjustments, IBAC has also met with the Insurance Bureau of Canada (IBC) to look at possible joint communication projects. “…to make sure we are speaking from the same page”, he adds.

As yet, IBAC has not approached insurers on a national level – namely the IBC – to discuss possible solutions to the decline in market capacity. With Ontario being much the “eye of the storm” in this regard, Wycks says that this aspect of the hard market has been left to the Insurance Brokers Association of Ontario (IBAO) to negotiate. “We’ve left this [tightening market capacity] in the IBAO’s hands, but we are monitoring the situation closely.”

Ontario’s auto “blues”

The IBAO has been engaged in informal discussions with insurer CEOs to evaluate market conditions, and potential impact current circumstances of the hard market may have on the province’s broker community, confirms the association’s president Danny Craig. Notably, he adds, the message brokers have tried to put across is to “apply reason” in actions taken. This, however, has been a more daunting task when dealing with foreign-owned companies. “There’s simply no room for negotiation.”

Although competition and capacity remain fairly strong in the Ontario market, Craig says insurers have begun reviewing their underwriting files and assessing broker contracts. The most dramatic turn in the market has been a tougher approach to underwriting guidelines, with a general move to increase the minimum deductibles on covers. So far, price hikes in rural Ontario have averaged between 15% to 17%, he adds.

The most significant cost factor in Ontario is auto-related bodily injury claims, Craig notes. “This really comes down to the auto product in Ontario, nobody can make any money.” Both the IBC and the IBAO have lobbied the provincial government for reform to the auto product. However, due to political delays, “this has become a very slow process”, he notes, “and I expect that this will be another year of the same”.

Craig expects that rates will continue to rise for at least the next two years, but hopefully on a more stable basis. The majority of independent brokers should be able to weather out the current hard market, he predicts, “although if this market continues, then we could see some consolidation among brokers”. That said, he feels that a hardening price market can work to the benefit of brokers against their direct writing counterparts. “This is an opportunity for brokers to show their worth. The direct writers don’t have this kind of personal relationship with their customers [in order to explain rate increases].”

The IBAO has also embarked on a “cost study” to illustrate the expenses faced by brokerages, Craig says. This is being done to quell industry pressures to reduce broker commissions as a cost-saving measure, a factor which Craig does not believe is likely. “I’m not concerned with commission cuts at all. The study will prove that brokers need existing commissions to remain viable.” He expects that the results of the cost study will be available by July of this year.

Atlantic evacuation

“We definitely have market problems,” comments Bob Kimball, chairman of the Insurance Brokers Association of New Brunswick (IBANB). This refers to the withdrawal of at least on major insurer from New Brunswick, while several others have pulled out of certain business lines and restricted writing new business in others. As a result of the worsening claims environment prevalent in certain parts of the province (namely the northeast region), Kimball notes, “some companies have begun broker reviews” – a.k.a. “broker rehabilitation programs”.

The IBANB held a meeting with its members in January of this year to gather feedback on the reduction of market capacity and the increasingly adverse underwriting restrictions that had come into play. This event took a broader turn when the provincial legislators showed an interest, Kimball notes. As a result, the provincial government appointed an investigative committee to look into the cost factors driving insurance pricing. The committee is expected to deliver its report sometime in July, Kimball adds, and IBANB and the IBC have already made presentations before its representatives.

Rate increases brought into place in New Brunswick over the last 16 months have averaged upward by about 20%, Kimball says, with much of the initial pain felt through stricter underwriting terms. Many companies have been reluctant to write new business, which has placed increased pressure on brokers. “The losses have been so bad that insurers don’t want to put any more capital at risk through new writings. On the other hand, the restrictions on new business may perhaps help brokers in that consumers are less keen to move their business. I can say that this has definitely been hard work.”

The IBANB will meet with the IBC at the association’s upcoming AGM, and during this period hold separate discussions with insurer CEOs to identify potential solutions to the province’s plague of losses. “There’s been dramatic change to our marketplace over the last 16 months, so hopefully the losses will begin easing off. If there is a good side to all of this, it’s that the rate increases have brought brokers closer to their customers.”

Stephen Greene, executive director of the Insurance Brokers Association of Nova Scotia (IBANS), says reduced capacity, tighter underwriting terms and escalating pricing are “all in play” within Nova Scotia. A greater burden has been placed on brokers to deal with underwriting, while the workload has gone into over-drive as a result of handling consumer complaints, he adds.

Essentially, Greene observes, “brokers have been caught in the middle”. While the association concurs that personal lines product reform is required within the province, and has met with the legislators, there is also a sense among members that insurers have over-reacted with pricing. IBANS plans on meeting with the IBC in the near future, he adds, to discuss future options and provide a broker perspective on what the problems in the system might be. “Some of our members certainly think that rates were moved up too quickly and by too much. There is definitely some concern out there.”

Insurers have only applied noticeable rate increases over the last six months, Greene points out, so determining the full extent that pricing may move in coming months is extremely difficult. “But, brokers are dealing with the market’s change. There’s been so much bad publicity over the extremity of rate increases in the media that this has actually helped brokers sell the higher rate adjustments. Most consumers are happy to see that their renewed policy rate is lower than what they have read about in the media, and they think they’ve got off lucky.”

Quebec’s “musical chairs”

Despite the fact that the Quebec market is regarded by the IBC to be the “only profitable region in Canada”, the reality of the marketplace does not reflect this optimism, notes John Morin, president of Morin, Elliott Associates Ltee. Specifically, Morin points to a withdrawal of some insurers from the province, as well as a retreat of underwriters from some classes of business. “There is not only fewer markets, but those that remain are applying stricter underwriting guidelines and prices.”

Morin concedes that the “capacity crisis” in Quebec is not as prevalent as would appear to be currently the case in Atlantic Canada and in the western provinces. However, there is a sense of concern among brokers that Quebec is heading down this same trail, he adds. “We’re not fighting the [rate] increases, increases are not the problem, it’s the stricter underwriting. Some renewals are not being renewed, and any new business has to be ‘pure’. It’s now much harder to get insurers to negotiate coverages.” For instance, he observes, “it is now very difficult to get homeowners coverage for rented single family dwellings.”

While retention levels have remained fairly high under the circumstances, Morin expects the market will ultimately become more volatile. There is still a fair amount of competitive play in the marketplace, he adds, with mainstream brokers representing on average about four markets each. The result is that consumers are “shopping” to a greater extent, which is not only adding to the workload of brokers in fielding queries, but this development is also leading to a situation that Morin describes as a game of “musical chairs”. “This is a period of “musical chairs” with policyholders switching brokers and insurers. For insurers and brokers, there’s going to be a lot of phone calls from people checking prices, which takes up time. It makes for a lot of work.”

Morin believes that the underwriting and pricing pressure currently in play could push a certain number of independent brokers into “clusters” in order to gain greater bargaining power. However, he is skeptical to whether the current environment is severe enough to bring about wide-scale consolidation within the province’s broker ranks.

The “wild west”

While the government insurer of British Columbia, the Insurance Corp. of B.C. (ICBC), has introduced a rate hike this year, as well the private insurers operating in the province, overall market capacity on personal lines remains high, says Don Ungaro, the incoming president of the Insurance Brokers Association of B.C. (IBABC).

ICBC introduced a 7% rate increase, applicable across the province, in the beginning of this year, Ungaro observes. The state insurer also raised the minimum deductible on covers to $300. This is the first time ICBC has raised rates in almost six years, comments Ungaro. “I think that this has more to do with political change in the province than a market reaction.” Ungaro is referring to the new Liberal Party government, which has indicated a desire to privatize state enterprises.

In terms of the private insurers, rate adjustments made this year have been modest, and mostly from companies that had been on the lower end of the rate scale, Ungaro says. He adds, however, that further rate adjustments to homeowner covers are expected by the summer. At this point, the private insurers have a competitive market advantage over ICBC (excluding mandatory auto insurance) in that they have not raised their minimum deductibles.

The greatest concern to brokers in B.C. is the uncertainty to what the future insurance marketplace will look like once the provincial government makes a decision on what to do with ICBC. Through the IBABC, brokers have a contract with ICBC which sets a standard commission fee and also ensures that the broker channel is the sole distributor of the crown insurer’s coverage. This contract will be up for renewal shortly, Ungaro notes, which further complicates the picture in that brokers have no idea to whether ICBC will continue to operate as a government enterprise. “We’re hoping to see some direction [from the government] soon,” says Ungaro.

Alan Jones, the incoming president of the Insurance Brokers Association of Alberta (IBAA), says there has not been much feedback from the association’s members with regard to higher rates and/or declining market capacity. Rates have risen across-the-board, he adds, with most of the action aimed at the liability component of auto covers. Overall, the rate adjustments have received little resistance from the buying public. This likely has much to do with media publicity about insurance rate hikes, which has prepared the public for the worst, he notes.

From a broker perspective, the current market remains competitive with available capacity, assuming the business is written at the right price, Jones says. He does, however, expect that further rate increases will result in some movement of business as consumers begin shopping around. “This will likely mean lower retentions, and brokers will have to work harder to keep their business.” The IBAA has set up a series of seminars to assist its members in explaining the need for rates increases. “As an association, we’ve held seminars to train CSRs [customer service representatives] on how to deal with explaining rate increases to the public.”

“Roll-along” prairies

Rate movement in Manitoba has been mostly on the commercial side, says Cliff Cook, president of the Insurance Brokers Association of Manitoba (IBAM). Personal lines business (excluding mandatory auto insurance underwritten by Manitoba Public Insurance) has also attracted modest rate increases, he adds, with the most significant action being higher minimum deductibles which have risen from about $200 to $500.

Losses on property have run high, Cook acknowledges, primarily as a result of severe weather, which has produced a number of major hailstorms and flooding. The higher loss ratios have seen some insurers moving out of certain lines of business, and limiting capacity overall. However, there has been no real move by insurers to cancel broker contracts, and most companies are still pursuing volume in new business, Cook observes. “It seems that insurers are still looking for new business, at least core business, so insureds can still shop around.”

While personal lines rates have moved up by about 10%, Cook is hopeful that pricing will now stabilize, “assuming we don’t have any other major losses in the short-term”. He believes that the rate adjustments applied have been necessary relative to the underwriting experience, so explaining the increases to policyholders has not been that difficult. Ideally, he adds, insurers should apply 2%-3% rate adjustments annually in order to avoid sudden shifts in pricing, as has been the case with the current hard market.

Bill Schwandt, president of the Insurance Brokers Association of Saskatchewan (IBAS), says pricing within the province has remained fairly stable. Personal lines rate adjustments have been mostly modest, he adds, with the increases accepted by the public. “The media has done us a favor this time around, with all the negative reporting on rate adjustments, consumers have been prepared for change.”

While brokers have had to contend with reduced underwriting capacity in some specialty lines of cover, the market still appears to be ready to take on new business, he adds. The government insurer, Saskatchewan Government Insurance (SGI), has introduced minor rate increases on non-auto business, and generally adopted a harder line in making sure these rate levels stick – this has enhanced the competitiveness of private insurers, he notes.

The biggest lump brokers have had to take this year is a reduction in commissions on hail insurance, Schwandt says. “As you can imagine, this went down really well.” Insurers decided to reduce the commission level rather than increase premium rates, he adds.