Mid-Sized Commercial Brokers: Holding the Line

A shell-shocked risk management and corporate buyer community is looking for rate relief, the return of capacity and, most of all, predictability in the property and casualty insurance marketplace. But, they should not hold their breath, according to a survey of some of the larger national and regional brokers. “The general consensus seems to be that insurers, just like many brokers, have identified their ideal or typical customer and are pursuing only business opportunities in these targeted markets,” says Jim Grieve, vice president of commercial lines for Toronto-based Sinclair Cockburn Financial Group. “I think this business plan will endure through the next market cycle.”

There are many reasons why the hard market, now defined by terms such as “best in class” and “selectivity,” will continue well into 2004, say several brokers. While an industry profit of $1.1 billion in the first half of 2003 sounds impressive, most of the gains came from commercial and personal property. These numbers obviously exclude the costly forest fires in B.C. and most recently, the destructive path cut by Hurricane Juan through Nova Scotia and PEI. That aside, the “casualty line” remains volatile and “spotty”, while auto insurance across the country continues to produce losses. As a result, there is no evenness to suggest a true strengthening of line-by-line industry results.

MARKET DRIVERS

The well-documented decline in capital levels in the global insurance industry has affected the Canadian market. More insurers in Canada are managing their capital holdings closer to minimum regulatory requirements. As such, infusions of capital have not kept pace with investment and underwriting losses – especially losses on so-called “legacy business” written on old years of account. Globally and domestically, insurers have less capacity to underwrite new risks and are increasingly reluctant to expose remaining capital to potentially volatile lines of business.

Then there is reinsurance, which several brokers say is driving continued pricing increases in the primary commercial market. Reinsurance results have improved only marginally in the past year. “There seem to be few good things said about this year’s reinsurance renewal season,” says Scott Creighton, president of Mississauga-based Creighton & Company. “The problem is that the big five reinsurers aren’t making money, and one of the main reasons is the old business on their books. The new business may be priced properly, but it is the longer tail stuff that is hurting them.” Commercial reinsurers in particular have suffered, and it is likely that reinsurance prices could rise again this year, especially in liability.

INSURER SELECTIVITY

The bottom-line for buyers is that insurers are still being picky, seeking “standard” rate increases and willing to walk away completely from certain classes of business, according to brokers. Capacity is available, but only for the right buyer at the right time. “For businesses that companies are targeting the capacity is there,” says Creighton. “For tougher classes, it is not getting better and may be actually worse. In some cases, insurance companies are refocusing and even abandoning classes of business.”

Marshall Sadd, president of Edmonton-based Lloyd Sadd Insurance, notes that, “I think the trend of insurer selectivity will continue. More insurers are becoming specialists, there are likely only two or three traditional generalist insurers out there and this market is particularly difficult for them.” He does, however, see some faint signs of hope and even some benefits in the current marketplace to this selective approach. “There is some play in the market,” he adds, “and we are starting to see an appetite for certain lines of business, such as construction, that was non-existent a year ago. We are now able to give clients a few more options.”

Other brokers are less optimistic about availability, indicating that many underwriters are jealously guarding their capacity. “We’re continuing to see a pretty firm approach by most, if not all, underwriters on class selection and terms applicable,” says Bob Shaw, vice president of Calgary-based Trilagy Insurance and Financial Services.

But, Creighton says finding a home for the “less desirable,” or abandoned accounts, is not easy. “A key problem for us is remarketing the abandoned business. And that is where the rate pops are taking place, often at 50%-100% [upward]. Insurers are still taking a hard line on pricing.”

LIABILITY BLUES

From a price perspective, brokers point to little evidence of a leveling out of rates for the general commercial market, even corporations with good loss experience. “Most underwriters continue to insist on their ‘standard’ rate increase on typical [general liability] GL renewals, with little regard to specific account or brokerage performance with the carrier,” says Shaw. “There is little merit given to those risks that have been properly priced.”

“We see no leveling of GL rates,” confirms Grieve. “Typical property rate increases [at present] are 20%-25% and GL are 30%.” But, observes Janie Osman, manager of marketing and business development at Toronto-based Hargraft Schofield Ltd., there is an emerging recognition of rate fatigue in parts of the industry. “I do sense that some insurers feel they have squeezed about as much as they can from certain accounts,” she says. “For their targeted business, they don’t want to lose these accounts and they realize that sharp pricing increases will only open the door to more competition.”

“I think some accounts have reached a breaking point on rate,” Sadd agrees. “But,” he adds, “we continue to educate our clients that this is happening right across the market. And clients are looking at other strategies. For example, they are reducing limits if there is a shortage of capacity at excess layers of umbrella or they are simply increasing their retention as a way to stave off yet another 15-20 % rate hike.”

“P” VS. “C”

The dearth of capacity affects all lines, but especially liability, with its long-tail claims and difficult reserving environment. In Canada, the loss ratio for liability has hovered steadily above 80%. “Although there seems to be a gradual easing of capital constraints, longer tail liability exposures are still very difficult,” says Shaw. “We are still seeing less appetite for increased retention beyond primary level.”

This applies specifically to accounts with direct exports to or operations in the U.S. “Many classes of GL are just not being written or renewed, such as U.S. exposure,” says Grieve. “The GL market continues to fragment.” Creighton points out that many of the standard markets that used to write some cross-border business, such as ING and Zurich, have largely abandoned this exposure and “that has created some capacity issues. But others, like AIG and ACE/INA, have picked it up, albeit writing it more carefully and at a higher rate. I think that many companies were getting a free ride when it came to cross-border risks for a long time. That has definitely changed.”

This change is not necessarily a bad thing, notes Creighton. “In past years, an underwriter may have asked on a standard GL how much a client sells or exports to the U.S. The client would have said about 25% of its revenues and that was that. Now, the underwriter wants to know about specific products, which states these are sold in, how specifically the end product is used, and so on. This is important information to get at.”

Several brokers point to commercial property as the likeliest area for any rate softening, particularly at the higher layers. The loss ratio for commercial property dropped from 68% in 2001 to 58% in 2002, and is now below 50% in some provinces. “We have seen some softening at the high end of the property market, namely over a quarter of a million dollars and at excess layers of umbrella,” comments Sadd. “But we have not seen it as much in the mid-market.”

Indeed, there is concern that the true mid-market accounts have not seen any rate relief. “We believe that so me small to medium-sized account have peaked in terms of rates, but because underwriting departments are not staffed to look at new business volumes in this cycle, the overpriced accounts are not moving to other markets,” says Grieve.

Sadd echoes these concerns about a critical shortage of underwriters at many carriers. “There is a lack of resources on the underwriting side, and we are saying of the clean accounts with good loss experience, ‘look, this is where you should be putting your capital to use.” The frustration of brokers in placing new business or seeking price reductions has spurred them to look elsewhere. That has been difficult in a prolonged hard market cycle such as this because there are fewer alternatives to ease the pressure. Lloyd’s of London, which has traditionally played the “alternative specialist” role in Canada, is only now beginning to regain profitability after several difficult years of losses and operational reconstruction. And, the oft-noted influx of capital from Bermuda has had only a limited impact in Canada’s standard commercial market, with much of the capacity directed to short-tail property lines.

ALTERNATIVE MARKETS

Yet, several brokers say that there are hopeful signs of change in the development of new or at least more prominent underwriting facilities. “Thankfully, many new special underwriting facilities are popping up, such as Precept Group, Totten Group, Encon’s new course of construction and environmental facilities and Temple Insurance, to mention a few,” says Grieve.

In addition, Osman points out that her brokerage has “tapped into facilities that we hadn’t used in the past. Issues around capacity have forced us to do this.” The market conditions have also spurred new opportunities for fairly experienced but relatively “undamaged” players, notes Sadd. “We have seen some insurers emerge that were not that visible even two or three years ago, such as Travelers. “Several of these carriers have the advantage of not being tied as much to past business and also not writing as much auto.”

But, brokers say signs of increased competition in the marketplace are not enough to soften a resolutely tough approach to underwriting. And many brokers actually welcome this cautious stance. “Underwriters are still taking a hard line, which I think is encouraging. The important questions are being asked, applications are now completely filled out and there are more checks and balances,” says Creighton. The focus is definitely more on loss control and following the appropriate procedures, says Sadd. “Those accounts living and breathing risk management and loss control are getting the attention of underwriters.” For Grieve, there is little point in asking when the soft market will come about. He believes the key trends of insurer specialization and risk targeting are here to stay, suggesting that there is a “new dynamic” in the business of the property and casualty insurance industry. “The Canadian insurance market appears to be maturing in its approach to risk and marketshare.”