IMCA/LCA Annual Meeting 2002: Strong Words

The property and casualty insurance industry is not in good shape. Natural and man-made disasters, from the Seattle earthquake to Tropical Storm Allison, and culminating in the events of September 11, helped to make last year the worst on record for Canadian and U.S. insurers, notes Glenn McGillivray, assistant vice president of corporate communications at Swiss Re Co. Canada.

Speaking at the Insurance Marketing Communications (IMCA) and Life Communicators Association (LCA) joint annual meeting, McGillivray explained that as a result of the industry’s financial woes, industry surplus is at a dismal level. “The industry has not built up a bank for future losses.” Falling investment returns, corporate defaults from Enron to Kmart, and the ongoing burden of environmental claims from asbestos to mold also wreaked havoc on insurer balance-sheets in 2001.

The result saw both insurers and reinsurers increasing rates dramatically this year, McGillivray notes. But, he adds, “the last soft market was so intense that even these increases are not enough [to bolster insurer surplus]…and this is barring any large losses [that may occur in the near future]”. The U.S.-based Insurance Information Institute (III) estimates that the industry has about US$100 billion in “targeted” commercial surplus to cover September 11 claims, McGillivray notes. But, he adds, “US$100 billion is not a whole lot of money”, especially given the compounding impact of other cat losses that hit the industry in 2001.

In the spotlight

For insurance communicators, September 11 did place a spotlight on the industry. For better or worse, the media was talking about insurance. Events such as the potential grounding of airlines without war-risk liability coverage showed the importance of insurance in the overall economy. The public was also exposed to the reinsurance industry, possibly learning about it for the first time. And there was substantial discussion over the financial “soundness” of the industry overall.

September 11 was a huge challenge for the industry’s communicators. “Declining claims, launching court battles, restricting coverage and raising rates all had to be done amid a very sensitive business, social and political environment,” McGillivray notes. And, 2002 is presenting further challenges to the industry, with exposures to failing economies in Argentina, Brazil and Venezuela, the still faltering investment markets, and claims costs increasing at a rate equal to or greater than premium increases.

Furthermore, auto and homeowners claims costs are becoming as much a headache to the industry as cat losses. “You don’t need a 9/11 or an Allison,” McGillivray says. “We’re getting creamed just by normal business.” The result will likely see further “polarization” in the industry, “with the strong staying strong, and the weak getting annihilated.”

Banking appeal?

The financial malaise facing insurers poses the question, “why would anyone want to be in this business?” And, indeed there has not been a mad rush by other financial institutions to enter p&c insurance. Despite new U.S. legislation under the Gramm-Leach-Bliley Act allowing banks to buy insurers, few have done so, notes Mark Ogren, director with Aon Financial Institution Alliance for Aon Corp. “Frankly, it’s not worked out to be what everyone expected.”

While banks have a wealth of information about their clients, very few are using that information, with surveys showing that only 32% of customers have three or more relationships with their bank, despite 58% saying banks are their first choice for financial services, he notes. Only 30% of U.S. banks offer p&c insurance, and most of these are through subsidiaries or third parties.

The biggest challenge has been integrating the sale of a long-term risk management product into the banking atmosphere, where faster, bigger returns are sought. Ogren still feels that bank and insurance business are a good fit. “It’s not about selling insurance. It’s a recognition by banks that insurance is an integral part of their customers’ lives.”

Lawrie McGill, vice president of strategic initiatives for CIBC Insurance, points out that the bank moved out of the personal home and auto business after it became clear in 1999 that the federal government would continue the ban against banks selling insurance through branches. The lines had been doing well, he notes, with a combined ratio of between 96-97% and returns on equity (ROE) in the low-teens. But, banks are looking for ROEs in the 18% region, and looking for that return in the first year or two of business. “Size [marketshare] matters, but returns matter more.”