Looking Inward

There is a song by a 1980-90s band called The The, in which the singer Matt Johnson advises: ‘If you can’t change the world, then change yourself.’

Besieged by world events that have substantially eaten into their profit margins, Canadian property and casualty insurers are starting to turn inwards and see what they might do to change their internal operations in order to adjust to their difficult financial environment.

Canadian Underwriter asked direct market property and casualty insurers to identify and discuss what they thought to be the single most important issue facing the Canadian property and casualty industry looking forward into 2010. Their responses are set out below in alphabetical order.

Not surprisingly, the answers were varied. They included deteriorating results in residential and property lines due to escalating water damage, technology to give consumers better access to the insurance product, Ontario auto reform, ongoing poor investment returns and a shaky market, among others.

But one theme running throughout the answers is a sort of insurance Darwinism — i.e. only insurers that adapt to their environment will survive. As the market appears ready to turn from a soft market to a hard market, insurance companies appear to be looking inward — i.e. proposing ways to improve their own underwriting profits — as a means to adapt to tough market conditions, thus finding the way out of the box into which external circumstances have put them.

1. Kathy Bardswick, President, CEO, The Co-operators General Insurance Company

My biggest concern heading into 2010 remains the ever-increasing cost of weather-related losses. Weather patterns are changing, our losses are mounting and there is little reason to believe this trend will change anytime soon. Water damage has surpassed fire as the main cause of concern among property insurers in Canada.

The increasing frequency and severity of storms is, of course, a long-term and very difficult challenge to address. One key, immediate call to action involves our preparedness and commitment to adaptation strategies.

As our population density grows, more and more Canadians are living in areas known to be prone to destructive weather. We need to do a better job of ensuring appropriate development in these spots. Exacerbating the problem is our massive infrastructure deficit, which the Federation of Canadian Municipalities estimates to be Cdn$123 billion. Our aging sewer and stormwater infrastructure’s inability to handle the intense rainfall that is now commonplace is a major contributor to the Cdn$1.5 billion in water damage claims we collectively pay each year. The federal government’s stimulus package included some badly needed infrastructure investment, but it is a one-time deal: a prolonged commitment is necessary. This is not a new issue, yet it remains largely unheeded.

Revising building codes to reflect the new reality of our weather, as well as our improved ability to construct safe, affordable buildings could go a long way toward protecting Canadians’ lives and property. Retrofitting existing buildings is also critical. These are major challenges, to be sure, and ones the industry will have to work on with all levels of government if progress is to be made.

2. Jean-Francois Blais, President, CEO, AXA Canada

2010 will be another challenging year for companies and brokers. I see two main issues. First, it is time for insurers and brokers to focus collectively on raising our delivered standards of customer service to be in line with changing consumer demands. Second, the implementation of a new auto product in Ontario will put great pressure on companies and brokers to deliver a product that clearly gives consumers more choices.

The most recent Ontario auto proposal puts forth numerous changes to enhance the consumer’s options and it puts some of the control of the cost of coverage in the hands of the insureds.

With consumer choice comes increased responsibility for us, the insurance industry, to properly explain to consumers the choices they may now make. Brokers in Ontario will have an opportunity to show their true value to their clients by giving advice on the new auto product, as well as enabling customers to make informed decisions.

This ties in well with the first issue. Companies must adjust their service delivery goals to meet the changing customer demands. It is important to listen to existing and future customers so that we may build a high level of trust and ultimately raise the profile of our industry.

For example, I believe the Internet and the broker channel need not be mutually exclusive. Our company is currently working together with its broker partners to bring to market a buy-on-line solution for consumers who choose to purchase their insurance through the Internet, and who want the benefit of a broker’s service, advice and support.

3. Charles Brindamour, President, CEO, Intact Financial Corporation

As we enter a new decade, we should take a few moments to reflect on our journey of the past 10 years. Overall, the industry has struggled to manage its own business cycles effectively, its profitability has remained less-than-stellar and the regulatory framework, while evolving, continues to stifle innovation in a number of jurisdictions.

More importantly, recent demographic trends, notably the aging of the Canadian population and the increasing contribution of immigration to our population growth, have resulted in rising expectations and new purchasing behaviours among consumers as they embrace new technologies. These developments are setting the stage for the agenda we should all be pursuing: keeping the customer at the centre of our business models and all of our activities. As consumers and their preferences change, our products, our services and the way they are offered and delivered must also change.

To succeed in this new environment, we must provide customers with the best value proposition and an exceptional experience; nothing less. That’s the reason Intact is improving on its promise to get customers back on track and promoting this message. That’s also why it provides brokers with a strong local presence, in addition to the technological and financial support brokers require to flourish in today’s and tomorrow’s marketplace.

As industry conditions change, we feel most confident in our ability to build upon our growth of the past 10 years. We are also more convinced than ever that brokers, given their entrepreneurship, will succeed by also building upon their detailed knowledge of their customers and the quality of the advice they offer. As a result, 2010 will provide all of us the opportunity to strengthen the confidence that customers place in our industry.

4. Alister Campbell, Chief Agent, CEO, Zurich Canada

Looking back at what I wrote last year, it’s amazing to me how much has happened in 12 months but how little the facts have changed. Industry results in personal, commercial auto, as well as residential and commercial property lines, are unacceptably poor. Long-tail liability lines look better, but this is illusory. Sustained low yields on fixed-income securities are most damaging on long-tail lines, so today’s apparent liability profits may be tempting new entrants to play, but the profits will not last and the final pillar of profitability for our industry will tumble soon enough.

With industry returns on equity (ROE) already in the low single digits, it can’t take much more to force the turn. And while a blessedly benign U.S. catastrophe season and a recovery in global stock markets may create a temporary positive uptick in available capital, underwriting losses and low yields may, in the end, do what they always do — turn the market.

What’s a winning property and casualty insurance company to do in the meantime? Do the boring things well! Price for exposure. Select risk with care. Focus on segments where there is true underwriting insi ght and deliver distinct and differentiating value propositions that earn sustained customer loyalty.

And what are winning brokers to do in the same time period? Do what winning brokers have always done. Select strategic underwriting partners with a strong balance sheet. So when things turn, as they will, brokers will have true underwriting partners rather than insurance company adversaries to work with to solve customer challenges.

5. George Cooke, President, CEO, Dominion of Canada General Insurance Company

The past two years have been difficult, as our industry has experienced deteriorating underwriting results and challenging investment markets. While we recognize the cyclical nature of insurance, previous cycles came when the economic climate was relatively good. Considering the impact of the recession and the influence of industry issues such as insurance-to-value, dislocation caused by aggressive customer profiling and severe weather events, we are in a truly difficult environment.

At the end of 2009, the Canadian property and casualty marketplace is sitting at, or near, the bottom of the industry cycle. In past cycles, the answer to getting to higher ground would have been rate management, hard work, sound investments and patience. In those times, 2010 would simply be another year — a year in which we would hold our collective nose, and do more of the same to muscle through towards better times.

This time, with most property and casualty companies operating in Canada having “de-risked” their investment portfolios, the profit response can only come from insurance operations. Operating targets established when companies could take advantage of economic turnaround through increased investment returns are no longer the appropriate standard. Companies have “de-invested” and hence operations must perform that much better.

Ethical market conduct, strong management and active leadership at every level, and from all stakeholders within the Canadian property and casualty industry, will be instrumental in meeting the demands of 2010 and beyond. In short, 2010 will be defined not by any one of the many issues affecting our industry, but by our ability to evolve the way we do business and adapt to an increasingly complex marketplace — a marketplace with significant inflation looming on the horizon for 2012 and beyond.

6. Kevin McNeil, President, CEO, Gore Mutual Insurance Company

We believe technology to be critical to brokers enhancing their value proposition for commercial clients.

Technology will be a catalyst for brokers to provide a new business model that will improve margins, create efficiencies and strengthen relationships through enhanced service delivery.

Other industries provide innovative technology platforms from which they serve clients. As clients increasingly become accustomed to paying bills online and receiving customized information that helps them research purchases online, the technology that enables them to do so becomes the new benchmark from which all service delivery is measured. Insurers must provide real-time, once-and-done solutions, paperless workflows and system integration so brokers can better serve their clients — quickly and accurately. When insurers fail to do this, the impact weakens brokers’ brands.

As capital strength builds, we hope 2010 will be a year of technology advances with insurers making a commitment to building solutions for brokers. It’s time for property and casualty insurers to become leaders, not laggards, in developing innovative technology solutions.

7. Ellen Moore, President, CEO, Chubb Insurance Company of Canada

Thriving in 2009 has not been without its challenges. Although economic indicators are more positive than this time a year ago, there is still much uncertainty for our business in 2010.

We expect the market to remain challenging in 2010. Our industry’s profitability continues to decline while capacity remains abundant. A dynamic market with new companies and products is important for our industry. It is equally important that our industry be seen to provide consistent and sustainable support to the consumer. We remain committed to managing our business responsibly in the face of the potential risk of further price deterioration and profit erosion. The compression on margins coupled with deteriorating investment returns is a dangerous combination. We have seen how consecutive years of underwriting loss hurt our industry.

In addition to the usual pressure, I think 2010 will require greater focus. Climate change and weather related losses are high on the watch list and we have a number of potential distractions on the horizon — including IFRS conversion, Part XIII execution and the implementation of the HST.

All that said, we are always excited about what a new year offers. Strong underwriting profit allows companies to be consistent in the segments they serve and be innovative.

8. Gary Owcar, President, Chief Operating Officer, CNA Canada

The sluggish economy, combined with a soft insurance market, makes this a very challenging time for all of us in the insurance industry. Exposures are down across the board and new business and renewals are as competitive as ever. Needless to say, these pressures affect carriers and brokers alike.

Individually, none of us can change the economic or insurance market conditions. But collaboratively, we can minimize volatility and sustain underwriting integrity. CNA Canada is committed to being a consistent and stable market for brokers and strives to provide superior service to them, as well as to mutual clients.

CNA recognizes strong broker partnerships are more important than ever. We believe in building these relationships by creating win-win-win solutions for the underwriter, the broker and the insured.

CNA’s strategies are built around achieving the following five objectives:

• Grow the top and bottom lines;

• Build strong broker relationships;

• Deliver superior service internally and externally;

• Build our human capital; and

• Build a culture of collaboration through communication.

CNA has also been working on a strategy to develop deeper expertise in a range of industry segments. By deepening our expertise in these industries, CNA will be better positioned to collaborate with our brokers, understand customer risks and add more value to the insurance transaction. We believe this approach will help us and our partners stay on course and manage through this cycle.

9. Rowan Saunders, President, CEO, RSA Group Canada

A progressive and focused strategy that fits the changing dynamics of the marketplace will set apart the leaders in 2010.

As I reflect on what I see in the market, I see a real divergence between companies with strong strategies in place, and those with either a misaligned market strategy or poor execution. It is becoming increasingly evident that some strategies are simply under-delivering. For some companies, that means CORs well in excess of 100%. I expect there will be a re-thinking or at least a re-direction of some strategies that will add fuel to a market already in transition. Only five short years ago, the industry found itself in a similar scenario. It is true now as it was then: only insurers with a strong and focused strategy, one that meets the differing needs of consumers and their brokers, will be able to support and lead in the marketplace.

The industry is facing enormous pressure on already under-priced portfolios as a result of the economic downturn, a decrease in investment income, auto reform and the impact of volatile weather. There will of course be different views on how to manage through this environment. Companies that have invested or are investing in their people now are positioned to succeed in this environment with highly skilled, engaged employees who have deep technical expertise. They are able to confidently step into the market, capitalizing on o pportunities that arise as some scramble to recover and re-direct their strategies.

While we expect 2010 to continue to be a challenging environment due to the transitioning phase of the insurance cycle, we believe now is not the time to “hunker down” but to support and grow with your brokers and customers.

10. Robin Spencer, President, CEO, Aviva Canada

As I am soon heading back to the United Kingdom, I would like to begin by thanking the entire Aviva Canada team and our broker partners for their support over the past five years.

If we flashback to 2004, consumer confidence was weak, a new product had just been released in Ontario with rate rollbacks and industry results were starting to improve given large price increases in commercial lines and stabilizing Ontario auto results. And there was much discussion about changes in distribution and consolidation in the industry. Sound familiar?

While we have made progress in improving our industry image, there is more to do. It is imperative that we continue to work together on solving industry issues. We need to deliver stronger insurance products and be able to explain to consumers what we do and why changes are necessary. We have to be proactive at identifying emerging issues and deal with them quickly and head on. If we don’t, others will do this for us — and we won’t like the outcome.

Aviva has transformed itself over this period. It has a single brand across Canada. It has a clear strategy focused on broker distribution, in addition to a corporate culture recognized as best in class. Its new CEO, Maurice Tulloch, is an exceptional leader with huge talent. The Aviva team looks forward to working with brokers across the country throughout 2010, continuing to build our respective businesses and serve our clients in an exceptional way.

11. Bob Tisdale, President, Chief Operating Officer, Pembridge Insurance Company

Over the past 20 years, Canada’s population has grown by 30%; in 2009, it is estimated to be at 34 million peo-ple. Small, single-family homes with unfinished basements have been replaced by much larger homes, many with fully finished basements built to maximize living space. High-quality finishes such as hardwood floors, home theatre systems and other expensive electronics and furniture have replaced old hockey equipment and other ‘junk’ that was often stored in basements. Now when a big storm hits, aging storm drains and sewer systems are stretched to the limit, resulting in significant damage for the homeowner. In the case of more densely populated communities, the necessary infrastructure isn’t in place to handle these storms effectively, resulting in a considerable increase in sewer back-up and other water-related claims.

This newer trend, coupled with an increase in mould-related losses, has contributed to a significantly increasing loss ratio. We are also faced with an insurance-to-value problem: the cost to repair a home and replace its contents is often seriously underestimated, costing insurers millions of dollars in premium. Personal property insurance originated as a product offering consumers protection in the event of a fire in their home. Over time, this coverage has evolved considerably from its original intent; now it provides comprehensive protection for a customer’s home and personal belongings.

Insurers can’t predict when or where storms or other weather-related events will occur. The industry must now do three things to address this issue:

• make risk mitigation a priority, by educating consumers about the importance of taking preventative measures to protect their home;

• develop and adopt best practices to ensure dwellings are insured to value; and

• encourage all levels of government to make the necessary infrastructure investments to better protect homeowners and mitigate future economic losses in their communities.

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2010 Will Be Defined Not By Any One Of The Many Issues Affecting Our Industry, But By Our Ability To Evolve The Way We Do Business And Adapt To An Increasingly Complex Marketplace.

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The industry is facing enormous pressure on already under-priced portfolios as a result of the economic downturn, a decrease in investment income, auto reform and the impact of volatile weather.

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Sustained Low Yields On Fixed-Income Securities Are Most Damaging On Long-Tail Lines, So Today’s Apparent Liability Profits May Be Tempting New Entrants To Play, But The Profits Will Not Last And The Final Pillar Of Profitability For Our Industry Will Tumble Soon Enough.