Locking Horns

The restriction-free entry of banks into the Canadian insurance marketplace, cycle management, consolidation and enterprise risk management (ERM) all featured prominently in A.M. Best’s inaugural Canadian conference in Toronto in September.

BATTLE AGAINST THE BANKS (CONTINUED)

The issue of banks expanding their powers to sell insurance came up during a “state of the market” seminar, in which Kathy Bardswick, president and CEO of The Co-Operators Group Ltd., and Mark Ram, president and CEO of Northbridge Financial, were asked to gaze into their crystal balls and comment on where they saw the industry going in five to 10 years.

Bardswick and Ram locked horns when discussing the possibility of banks being able to sell insurance from their local branches. Canada’s Bank Act currently prohibits banks from selling or distributing information about insurance products from their retail branches. The two panelists were asked: “What impact on the [insurance] industry do you foresee if banks are able to fully operate in the industry?”

Bardswick said she believed the banks should be allowed in. “The more we move to the directs [direct writers], the more we [as an industry] have relationships in which we are putting the shopping decisions on the client, and the less effective we are at keeping banks out of the business,” she said. “But I am also suggesting that we [as an industry] need to assume some of the responsibilities, as we see the relationship move more and more direct.”

Bardswick said the consumer’s reliance on direct writing, in which an insurance agent sells the products of only a single insurer, is increasing. “The more the consumer is able to do those things [i.e. compare prices and purchase policies — check quote], the less we will be able to advocate that we need to have a strong and vibrant broker system to help the consumer to find the right product at the right price. That’s increasingly not the situation.”

Ram said he believes the property and casualty industry has enough capital as it is and does not need any additional capital from the banks should they enter more fully into the insurance market. He believes banks will likely be allowed into the insurance market without restrictions.

Given that banks have access to and the ability to leverage client information, if banks were allowed to sell insurance in their local branches, then that would be a major threat to the property and casualty market and the independent broker channel, Ram said. He argued the entire dynamic of the industry would shift rapidly, with far-reaching, devastating effects. The banks’ first target for insurance sales would be personal lines, he said. This would ultimately lead to further consolidation within the insurance market, and the eventual withdrawal of foreign players, he predicted. “And then you would see the commercial players get hit,” he said. “I cannot think of a single thing that would have a larger and quicker change on the Canadian p&c market.”

Bardswick fired back with the example of Quebec-based Desjardins General Insurance Group, which has a presence in both the province’s insurance and banking sectors. “They are not devastating the rest of the industry,” she argued, noting that Quebec probably has the most stable market. “I just think we can make this work without restricting access to the market,” she said. “If you have a compelling business proposition, then we should be able to make it work.”

Ram remained steadfast. “I don’t know how a bank teller can provide the same level of expertise as a broker,” he said.

CYCLE MANAGEMENT

On the issue of cycle management, Bardswick was asked to comment on a recent Insurance Bureau of Canada (IBC) public announcement that Canadian auto insurance consumers had saved roughly Cdn$7 billion over the past few years, primarily due to private auto insurance market reforms. Did Bardswick believe the benefits of the reforms had been recognized? And at what point does the pricing become inadequate?

“We’re past that point,” Bardswick said, quickly responding to the question about pricing. “We’re realizing that we’re not maintaining adequacy because of increasing cost and frequency pressures.”

It doesn’t take long for an insurer’s mounting costs to outpace the incoming premiums, she added, and yet “you still have a political process that keeps your rate increases at zero.” As a result, the industry is finding itself in a bit of a pressure cooker, she said.

Although Ontario will likely benefit from the full implementation of HCAI [Health Claims for Auto Insurance] in early 2008, that might not be enough to keep auto insurance claims numbers down, Bardswick observed. “The mechanism of having better and more complete information for the individual insurer and as an industry will be a benefit, but I don’t think that’s going to outweigh the frequency pressures that we’re starting to see and the cost pressures that we’re starting to see.”

It all adds up to a fairly clear message that the industry is due for some premium pricing adjustments, she concluded.

Ram was asked whether he believed the commercial industry learned anything from the hard market of 10 years ago. He said he remained optimistic that mitigating factors today — factors that were non-existent in the late ’90s — would keep the industry’s financial situation from sinking as low as it did a decade ago.

One such mitigating factor is the level of today’s interest rates. “We are not sitting here with extremely attractive interest rates, or an environment in which there’s a widespread belief that rates are about to rise,” Ram said. “Today we have to generate something on the underwriting side, so that we can consistently meet our ROE [return on equity] targets.”

A second mitigating factor is the pressure that ratings agencies and publicly-traded companies exert today on insurers to promote transparency and develop sound risk management processes. This pressure was all but non-existent in the 1990s, Ram noted. He went on to say these pressures have forced leadership at the senior levels of most Canadian property and casualty companies to grow more sophisticated — including the development of a more robust financial analysis and a broader-based approach to strategy and financial management. This sophistication, he continued, “is having an impact on the understanding of the cause of the market,” which in turn helps to prevent a repeat performance of the hard market era in 2001-03.

Ram described current reinsurance rates as a third mitigating factor.

Although Canada would likely see a continuing soft market in the near future, the three mitigating factors mentioned above would act as a kind of “brake” on the situation, Ram said.