National Broker Roundup: Back to Dating

Insurers and brokers have always emphasized the close working relationship that has afforded both segments of the property and casualty insurance industry to not only survive, but presumably to prosper. Just over two years ago – the year 2000 BHM (before the hard market) – insurers were falling over themselves to sign brokers on through contingency fee and commission over-ride arrangements with entire portfolios of business being switched during this period of the “great romance”. Now, in the year 2003 IHM (in the hard market), the honeymoon has turned to bitter reality as companies have slashed business, cut broker relations and indirectly set the wrath of the insurance-buying public on brokers who, being at the frontline, have had to deal with the onslaught of consumer complaints and increased legwork in dealing with “price shoppers”.

However, lack of capacity – and in many cases outright lack of markets – is the real concern of brokers right now, brokerage commentators countrywide say. While some prefer to not go “on the record” in discussing their “relationship breakups”, there are reports of brokers taking “zero commission” simply to place business with the long-term view of retaining a good client. Insurer cutbacks on business have not been restricted to the high loss auto line either, but encompass all classes of business, brokers note.

And, while the industry’s direct written premiums rose by 23% year-on-year for 2002, which suggests that broker commission revenue would have risen proportionally – this is far from the reality, brokers say. Gaining a 23% increase on some business while losing more than 30% of other business that cannot be placed or retained due to price is hardly beneficial to the bottom-line. In addition, the add-on administrative and client relation costs of dealing with the hard market are eating away at operating revenue, they lament, particularly when business has to be turned to the high-risk Facility Association (FA) simply to find coverage. The FA applies commission caps, and according to brokers from numerous regions, is also backlogged for months in processing policies due to the dramatic increase in business volume.

“It’s not that insurers have become mean spirited, it’s just that they are restricted on their capital use,” observes George Cooke, president of The Dominion of Canada General Insurance Co. Cooke’s comment applies to the stringent underwriting criteria being applied by insurers which has seen broad cutbacks in cover countrywide and companies reducing their broker relationships. “There isn’t a day that goes by that we [Dominion] aren’t being approached by brokers looking for contracts,” he adds. As such, he concurs that brokers are now operating with fewer markets than was the case two years ago, “there are definitely fewer opportunities [for brokers]”.

The tightening of the marketplace has placed pressure on broker commissions, Cooke says, mainly through contingency fee and “growth bonuses” with the latter virtually unheard of in present conditions. “We [Dominion] have not touched our base commission, but we have made some adjustments on contingency arrangements, which have been widely accepted.”

Cooke also claims that Dominion has avoided what he describes as “mass scoring exercises” supposedly applied by some companies in slashing business – in other words, not rating risks independently on merit. Looking ahead, Cooke does not see much change in the marketplace for at least the remainder of this year. “I don’t think insurers’ ROE [as an industry] is going to get any better in 2003, which means that the hard market is here to stay.”

Where insurer/broker relations may once have been familiar to a scene from “Little House on the Prairie”, the times have changed – a.k.a. the “hard market”. Skyrocketing rates, company withdrawals from regions and various lines of business culminating in a countrywide dearth of coverage capacity, coupled with a hard line by companies in dealing with their front-end distributors has left the independent brokerage community more than a little frazzled. Brokers, and even company commentators, agree that the insurer/broker relationship has come under strain as a result of the hard market conditions which kicked into full drive from the outset of last year. With no sign of market pressures easing off, brokers are back to the “dating game” in wooing their partners.

ONTARIO’S SHORTAGE

“There is a lot of frustration out there,” comments Jim Hawryluk, president of the Insurance Brokers Association of Ontario (IBAO). Negotiations on commission levels were unheard of a year ago, he notes. And, while contingency fees and profit-sharing arrangements are still ongoing in the Ontario marketplace, brokers are making a lot less through contingency payments simply due to the losses emerging through claims.

Hawryluk believes that the shortage of markets is more acute in Ontario compared with the other provinces as a result of the sheer volume of business involved. Insurers are also looking very closely at broker contracts, he adds, with an eagle eye on loss ratios. And, as a general trend, companies have adopted a strict approach to processing policy applications where the slightest error or omission of information results in automatic denial. “It doesn’t take much of an excuse for insurers to turn away business.”

Furthermore, the average broker’s book of business in Ontario is probably about 65% auto, he points out, which is where the claims losses have been the most severe and where companies have been most ardent in cutting back on business. Faced with declining markets and reduced capacity from those insurers still “open for business”, some brokers have been forced to approach other brokers simply to place a risk, Hawryluk says. In some cases, he has heard of brokers taking commission cutbacks as a means of keeping rates down in order to retain a good account. “I believe that broker/company relationships are not what they used to be. Companies are not running out there tripping over themselves in handing out [broker] contracts.”

While internal capacity limitations on insurers is a problem, as a result of the constraints of capital in writing new business, Hawryluk says that the real underlying cause of the capacity shortage in Ontario lies with the auto insurance legislation. Although the province’s insurers and brokers recently scored a victory through the packaging of new auto insurance legislation under Bill-198, which should see a reduction in bodily injury losses and a tightening against fraudulent claims, there were several loss-cutting measures proposed by the industry that did not make it into the legislation, Hawryluk says. This has resulted in ongoing caution by companies in taking on auto business, he adds, as a great deal of uncertainty remains to how effective the product reform will be over the mid to long-term. In addition, the passage of the legislation has been rather slow, he observes, which has not helped to inspire insurer confidence in the marketplace. “Speed is unfortunately not a characteristic of bureaucracy – that’s just the way it is.”

The emphasis on auto by insurers in reducing their loss exposures has created another, indirect problem for brokers, Hawryluk says. A significant volume of business has been redirected to the FA simply because there is no other market for it, he adds, which has caused strain on the association’s resources. Some brokers are now applying an add-on “policy write-up fee” in handling any auto business through the FA due to the increased administrative burden involved. “A significant volume of business is going into the FA because insurers won’t write it, and brokers are having a heck of a time on this one.”

Hawryluk believes that some of the pressure on price will ease up by the end of this year as hopefully the auto product reform underway begins to produce improvement to companies’ loss ratios. And, he notes, ultimately consumer tolerance for price increases will reach a ceiling that could motivate government action – something that the insurance industry would very much like to avoid. “A lot depends on the Ontario government, but I think that pricing could ease off slightly by the end of the year. However, it will still be tight to place business.”

Quebec’s success

Quebec – Canada’s second largest private insurance marketplace based on premiums – has become the “darling child” of insurers. However, the current market stability from a capacity standpoint as well as profitability, only occurred after several years of stringent rationalization and shock price increases, notes John Morin, president of Morin, Elliott Associates Ltee. “Quebec has been a success [for insurers] for the past two years, but only because we went through the rate increases before everyone else.”

Although underwriting capacity within the province has remained fairly stable through the hard market, Morin says that, from a broker perspective, there have been some upsets. Notably, the withdrawal of Royal & SunAlliance from the province last year when the company sold its book of business to CGU caused a market vacuum. Brokers who had dealings with both companies suddenly found themselves with one less market, he adds.

That said, brokers have not had to make any concessions on commission or other sources of revenue through the latest hard market, Morin says. Insurers have also maintained existing relations with brokers, he adds, and those relationships are perhaps even closer today than they have been in past years. The emphasis of companies in awarding broker contracts would seem to be mostly on business volume, he notes. “Although, I don’t know how a new broker would fend in this marketplace.”

Price increases are perhaps the biggest issue in the province, Morin says, particularly on the commercial side, where premium hikes of 10%-15% are still common. Insurers remain cautious about the type of risks they are prepared to take on, he adds, which has made the placement of large commercial risks challenging. “Limited underwriting capacity is driving pricing. What’s happening in Quebec is just less severe than what is happening elsewhere.”

Atlantic region’s woes

With the Atlantic provinces having produced the worst auto losses from across the country for more than a decade, last year saw a mass exodus of insurers from the region while others have exited from the personal lines marketplace. This has resulted in a critical shortage of underwriting capacity across all lines in the region, says Mike Brien, president of Nova Scotia-based Macdonald Chisholm Insurance.

The loss of capacity has been accompanied by insurer cutbacks on broker contracts, Brien notes, although this has not yet translated into reduced commission levels or cancelled contingency fee arrangements. “The commission issue is on the backburner, but contingency fee arrangements have been altered and tied more to performance and profitability of business. The benchmark of what is ‘profitable’ has also changed.” As such, he says pressure has increased on brokers to meet the underwriting guidelines of companies. “Underwriting is as stringent this year as last year.”

The biggest issue in Atlantic Canada for brokers and insurers alike is bringing about much needed product reform on auto, Brien observes. Nova Scotia is currently investigating such options, he adds, with New Brunswick closer to putting a legislative package together. Nova Scotia will likely look to what the New Brunswick government comes up with, Brien says, which could introduce some future problems in that the latter appears to be taking a fairly hard line with insurers. “I don’t think that in this kind of market that insurers want to be pushed by the legislators.” In this respect, Brien sees political interference as being a far greater threat to the future of private insurance in the region than the current capacity shortage.

Robert Kimball, former chairman of the Insurance Brokers Association of New Brunswick (IBANB), confirms that the New Brunswick government recently released an outline for auto product reform. “So far, there hasn’t been time to gather an industry response to it yet.”

Insurers have generally adopted a “wait and see” approach to how the government would respond, Kimball says. As such, underwriting capacity within the province has been tight, he adds, although not as dire as other regions in Atlantic Canada. Insurers began evaluating their broker contracts about 18 months ago, he points out, which did result in some relationships being terminated. “Based on the current number of carriers operating in New Brunswick, I don’t think that capacity is going to be a problem if they [insurers] are comfortable with the product reforms put forward by the government.”

Alberta’s uninsured

While there is a scarcity of capacity for both commercial and personal lines in Alberta, the latter is by far the biggest headache for brokers in placing due to the sheer volume involved, says Alan Jones, president of the Independent Insurance Brokers Association of Alberta (IIBAA). Insurers seem to be applying a broad-brush in turning away business which has added to the strain in relations between brokers/companies, as well as between brokers and their customers, he adds. “You have to handle each customer individually, and with the difficulty of placing business, brokers are under-paid right now.”

Although insurers have not reacted strongly in terminating broker contracts or taken action to reduce commission arrangements, Jones believes that “brokers will be under the gun [this year] in terms of the profitability of the business”. This year has seen insurers not pursuing new broker sign ups, he adds.

The biggest concern in Alberta is the high volume of auto business that is being funneled into the FA. “With the repopulation of the FA, they [the FA] are now backed up by six months in issuing policies. There is a good percentage of business that is ending up in the FA which is potentially ‘good business’,” Jones observes.

Faced with steep rate increases on auto, there is also a growing concern that motorists will go without insurance, he notes. With the average annual auto insurance policy costing around $5,000 and the fine for driving without insurance presently at $2,500 – there is an “incentive” for law abiding drivers to disappear into the ranks of the uninsured. As a result, Alberta is also working on auto product reform under Bill-33, Jones says, and gathering support for the proposed legislation is a top priority for brokers in the province.

B.C’s optional bid

“We haven’t seen a withdrawal of insurers from the ‘optional insurance marketplace’, in fact, we’re meeting with companies to look at ways to increase participation and make this market more competitive,” says Don Ungaro, president of the Insurance Brokers Association of British Columbia (IBABC).

The province’s crown insurer, the Insurance Corp. of B.C. (ICBC), has maintained price stability in basic auto insurance with the more significant rate increases directed at high-risk drivers based on past driving records, Ungaro notes. As such, broker relations with ICBC have remained firm with no pressure on commission levels. “Through the latest five-year accord signed with ICBC, commission rates have risen slightly.”

However, the commercial insurance marketplace in B.C. is suffering from the same capacity and pricing problems experienced elsewhere in Canada, Ungaro says. “Anything out of the ordinary, and we’re [brokers] running into problems in placing it. It’s extremely difficult to place anything that might be associated with earthquake risk.”

Excluding the basic auto product under ICBC, Ungaro says there has been increased pressure from insurers on brokers to tame loss ratios. This has not yet translated into any significant broker relationship cutbacks by companies, he notes, or reduction in commission levels. “We know that companies are looking at their broker arrangements, we’re just in the initial phase of this. I guess you can say that it’s simmering right now. We’ve also heard rumors of some insurers looking at reducing overhead by cutting back on commissions, but that won’t go down well [with broker s].” Overall, Ungaro does not expect to see the market showing signs of “loosening up” for the next 18 to 24 months.