Fishing for Commercial MarketShare

Some truths we just accept. We know death and taxes are ultimately unavoidable. Most of us allow that the moon is not made of green cheese, and we’re reasonably sure the sun will rise tomorrow. And we all know the insurance business is cyclical, that soft markets inevitably harden and vice-versa.

But occasionally facts contradict our beliefs and we have to adjust our thinking. Certainly, the current Canadian insurance market would challenge any assumptions about an inevitable hardening. That long-awaited event just has not occurred. Instead, insurers must rely on other strategies to grow their top lines. This spring, many appear to have focused their plans in the same area: one insurer after another has signaled a renewed appetite for commercial lines.

Some factors driving the revived interest are obvious. While investment income, increasingly regulated, still languishes, the necessity of an underwriting profit becomes increasingly clear. Commercial lines can certainly be profitable for insurers that get the formula right. Within Canada’s commercial market, which is currently made up of some $10 billion of written premium, the average 2010 loss ratios for commercial property and commercial liability were 41.5% and 54.9% respectively.1 This contrasts starkly with Ontario automobile direct loss ratios (99.5% in 2010 and 90.6% in 20092), which comprise an overpowering fraction of the Canadian market. Common sense compels insurers to have at least a share of the most profitable lines.

Although the market is already divided among dozens of competitors, new investment capital, drawn by potential profits, is still arriving. Byron Hindle, Intact’s senior vice president of commercial lines, sees irony in some of the competition for market share – particularly in the West and Quebec, where it can be “almost self-defeating because of the competitive pricing,” he says. “Bidding down prices to the point that a general margin is no longer available.”

Yet another wild card is the influence of technology. Commercial lines have largely resisted automation, clinging to paper files, Word documents and hand-written notes. Consequently, there is greater scope for change. Insurers eye the potential for gains in underwriting, analytics and process. But they must make hard choices about technology even while it evolves at lightning speed.

With so many factors in play, and no hard market in sight, insurer strategies must go much further than simple price-slashing to ensure success. Carriers are deliberately taking radical new approaches in their efforts to differentiate themselves.

Growth by Acquisition

Intact’s recent blockbuster deal to absorb AXA Canada makes plain a growth strategy by acquisition. However, Hindle says “regenerating their approach” to commercial lines goes back some years, to a time when Intact’s commercial market share had decreased slightly. Although the portfolio was still profitable, the company deliberately focused on reversing that trend, investing in training and communications to convey their eagerness to write commercial business on an account-centric basis.

Competitive pricing is also a factor, but Hindle maintains the importance of underwriter judgment in establishing ultimate ‘walk-away’ points. Those choices might be aided by new information tools and pricing models, but Hindle says Intact still ultimately relies on quality underwriting. Hindle sees a measured use of technology, balanced finely with old-fashioned experience and relationships.

Observing that both Intact and Axa are among the very few insurers currently growing profitably, he confirms they have indeed reversed previous trends. He looks to the new merger to “broaden their offering” even further, with “holistic, customer-centric solutions for our brokers.”

Integration into One Brand

Northbridge revealed its own new approach to the Canadian market in a June 20 announcement. Previously, three of its broker company subsidiaries – Lombard, Markel and Commonwealth – operated separately. Beginning Jan. 1, 2012, they will all integrate into one brand, Northbridge Insurance. The company sees this as an opportunity to leverage many aspects of their business, including product differentiation, access to products and underwriting expertise, training and development, marketing support and overall business efficiencies.

Mark LeBlanc, senior vice president for Central Region at Lombard Canada, explains that “scale produces competitive advantage, and gives an organization the ability to invest,” notably in technology. Northbridge’s restructuring will pool financial, data and talent resources and allow even greater focus on high-level strategy going forward. Beyond gaining initial efficiencies, however, Leblanc emphasizes the advantages the enhanced data that their combined forces will provide, largely through data mining. Northbridge expects to gain better understanding of customer segments, permitting a focus on sectors “business by business.” Risk selection tools used with the larger data pool will allow underwriters to choose “best of class” and determine specific pricing. Further, LeBlanc sees developing that same rich pool of information into value-added risk-management tools for clients.

Segmentation Strategy

Aviva’s strategy, in comparison, is all about segmentation. The goal for commercial lines, as articulated by Joe Vachon, executive director for national commercial lines and Ontario GTA, is to be “dominant” across Canada. Analyzing their own portfolio as well as the general marketplace, Aviva observes that different business segments – national, mid-market, and small business – have different insurance requirements. Therefore, Aviva is offering different, enhanced solutions specifically targeted to each sector. The company also recognizes that for specialized sectors, the “business (that) is highly expert,” regional offices spread across the country can be challenged to provide needed levels of service. Aviva has therefore undertaken to build out their national business unit with centralized resources. On this unit, Aviva says, the company is “investing and going deep on expertise.”

Vachon further explains that segmentation extends to brokers, since “not everyone needs the same things from us.” Aviva has developed detailed “broker value propositions” to recognize requirements from brokers of any size – national, regional or local. Large national houses may not require assistance with perpetuation planning or co-op marketing, but these “value propositions” might be very useful to some local brokerages. In addition, some brokers might have an appetite for manuscript wordings or complex claims management programs. Aviva intends to deliver broker services in customized combinations, all intended to support communication and to ease the flow of business across segments. Importantly, the plan includes a “significant investment in our commercial lines platform, to enable brokers and underwriters,” Vachon says.

Insurers agree technology benefits for commercial lines are still largely untapped. The industry is just beginning to realize the value to be extracted from aggregated data through predictive underwriting and data mining. Countless efficiencies are possible for rating, data collection, document sharing and risk management. However, some broker frustrations, familiar from personal lines, arise when proprietary insurer solutions require duplicate entry or unique processes that counter efficiencies.

Sheldon Wasylenko, technology champion for the Insurance Brokers Association of Canada, cautions that when that data moves between brokers and insurers, certain principles must apply if both parties are to benefit. “Brokers must extract electronic information from their own systems to communicate seamlessly to insurers without being forced to input additional, unrecorded data into insurer systems or portals, ” he says. Broker and insurer systems need to speak the same language, using CSIO standards that allow data to be handled consistently. Recent development of CSIO commercial forms and standards has flagged, but demand is again increasing because of new attention to commercial lines automation.

1.Source: MSA Research2.MSA/Baron Outlook Report, Q4-2010