GOING FOR THE NICHE APPLE

The growing demand for underwriting capacity for specialty risks is good news in terms of adding protections in existing sectors such as “directors & officers” (D&O) protection, while developing innovative products to safeguard against technology and e-commerce related risks — many of which were unthinkable even five years ago.

How globalized niche lines will develop remains to be seen. The ideal scenario is that if a customer has a specific need not available in the home market, the insurer will be able to meet it elsewhere in the global network. Certainly this gives larger, multi-national insurers an in-house advantage against smaller, non-aligned niche players.

In transportation solutions, for example, Coast Underwriters (a Royal & SunAlliance equity partner) can plug into the group’s London-based marine unit to make Canada one territory in a “borderless global underwriting strategy”. Our recent affiliation with British Aviation Group (Canada) Ltd. has also opened the door to one of the largest aviation underwriter specialists on the global stage. This is not to say that there isn’t room for established niche players in an expanding market. Trust will remain a factor — especially as new entrants try to establish a track record and fine tune product lines, sometimes with mixed results.

Bringing Canada to speed

Nevertheless, it is easy to see the attraction of integrating Canada into the global niche market. In this saturated property and casualty environment, specialty products have enormous growth potential in both mature and developing markets as a largely untapped opportunity in an attractive high margin sector. Specialty lines in Canada could grow by an estimated 20%. Certainly, one of the real growth areas will be in professional and financing, and in alternative risk financing (ARF). Canadian D&O and miscellaneous “errors and omissions” (E&O) are expected to benefit with the addition of non-conventional and more innovative coverages. Seeing the market’s potential, the Royal & SunAlliance group has been quick out of the gate in developing what it considers new and appropriate coverages in the financial arena. Many of these programs provide insureds, producers and groups, the flexibility to participate in underwriting the risk. This incorporates alternatives such as captives and finite reinsurance.

Targeting markets

We expect that ART financing will likely be one of the most sought after of unconventional lines. Unlike traditional insurance risk such as covering a building, alternative risk financing (or ARF) looks at things like financial market or commodity risk, or unique operating/business risks faced by a particular corporation.

Risk financing is already popular in the U.S. and the U.K. where it has experiencing rapid growth. The concept appears to be a good fit for the Canadian marketplace. In terms of customer service, more products on the specialty shelf means more opportunity for carriers and/or brokers to listen to a customer’s needs and deliver a customised solution. Even in an expanded universe we may not write every piece of business that comes along (some requests can be quite bizarre), but as a group we are positioning to better respond to emerging opportunities.

There is also the fact that an insurer’s mainline and specialty businesses complement each other. If somebody decides to place a marine policy with “insurer B”, for example, there is a higher than average chance to grab the rest of the business — and vice versa. Still, even with growth opportunities there are risks. Multi-national insurers may find it difficult to resist the temptation of micro-managing the Canadian product outside of Canada. At the same time, the arrival of new products and services will definitely increase competition while placing downward pressure on price. This will certainly erase the higher profit margin which is one of the main attractions of bringing new specialty solutions to market.

Both cases could result in a patchwork of carriers abruptly withdrawing from the sector, creating more instability in a line of business already notorious for the high turnover of service providers.

The global supply

We are already seeing evidence of this in the U.S. Despite world-wide capabilities being the catalyst for new specialty products in Canada, the segment remains more customer-focused than it is product driven. Global carriers who fail to act locally are likely to overlook the skill sets necessary to align a fragmented business with a diverse and small marketplace. Of the two issues, however, pricing poses the greater threat. Globalisation accelerates the probability that someone will come in and upset the delicate balance that niche products need to survive.

It is inevitable that globalisation is going to bring new supply to the market. What is ironic, however, is that the industry should be contemplating a price war in the one market segment that has the growth potential to break property and casualty insurance out of the depressed profit cycle already caused by discounting in other areas such as automotive. Carriers who expect the market potential of niche lines to outpace the damage caused by price-cutting are once again going to experience disappointment. This all suggests that the niche market is about to enter a period of uncertainty as global companies jump in and out of the Canadian market with new products and services.

In this environment, success will ultimately go to those who can withstand the price war, provide the skills sets and offer the broadest range of stable and innovative products either locally or through global transfer mechanisms. What it means is that we are finally going to remove niche lines from the “take it or leave it” approach that once characterised the industry during the bad old days of limited choice.