Point of Attachment

Stepping away from big-city insurer Kingsway General and into the agriculturally-based world of mutual insurers might have been a culture shock to some. But for Steve Smith, CEO of the Farm Mutual Reinsurance Plan (FMRP), it was more like coming home. Now, with a combination of street smarts and respect for the mutual tradition, he hopes to guide cedants through the bumpy course of reinsurance renewals.

When Ontario’s mutual insurance companies banded together 45 years ago to create the Farm Mutual Reinsurance Plan (FMRP), it was in response to a challenging reinsurance market: in the post-war boom, property values were rising and construction levels peaking, and the requirement for higher limits of reinsurance challenged the smaller mutuals, whose retentions were often well below that expected in the international reinsurance market.

In fact, mutuals had been banding together to solve their reinsurance availability issues since the 1930s when, through inter-company agreements, any one company could share portions of risks in excess of its own retentions with other mutuals. By the mid-1940s, this crystallized into the “Supplemental Reinsurance Pool”, operated by the Mutual Fire Underwriters’ Association as a pooling mechanism. Simply, a mutual company could cede excess amounts of insurance to the pool for a pro-rata share of the premium.

But significant changes took place in insurance, as in all industries, following the Second World War. In the late 1930s, the Canadian industry’s written premiums were less than $80 million; by the late 1950s when FMRP was formed, auto insurance alone accounted for double that amount in premiums. Mutuals struggled to find adequate reinsurance protection for the rising value of the risks they covered, given their relatively low retention levels. Under the FMRP program, member mutuals were required to cede all of their reinsurance to FMRP and not to assume business from other companies. The concept behind FMRP was to create aggregate retentions which can then be taken out into the international reinsurance market to obtain coverage.

FAMILY TIES

Fast forward to late 2003, when Steve Smith took over top spot at FMRP, what remains Canada’s only domestic reinsurer, with a strong balance sheet and ever-expanding operations. While much has changed about the insurance world since 1959, Smith says the spirit of co-operation at the heart of FMRP remains.

Smith describes farm mutuals as a close-knit community. “You get very attached to everyone in the mutual system very quickly. You become part of “the family” very quickly.”

Taking over the CEO’s role at FMRP was in a sense a homecoming for Smith. Although he had served as executive vice president and COO for Mississauga-based Kingsway General Insurance company since 1991, in the mid-1980s he was general manager of the former Ontario Mutual Insurance Co. as it made the transition into a general insurer under the Symons Group banner.

FMRP’s Cambridge, Ontario head office was even a stone’s throw from the Acton home Smith shares with wife Colleen and their four children, allowing him to continue his avid interest in the outdoors. This includes a love of hockey, golf, fishing and hunting, including training and judging field trial retrievers.

But Smith also stepped into his new role facing challenges. In the fall of 2003, mutuals, like other insurers, were reeling from the effects of Hurricane Juan’s assault on Atlantic Canada, as well as the B.C. wildfires. Nonetheless, he says he took the reigns with confidence. “I had a certain comfort level because I had confidence in what the mutuals were doing. We budget for catastrophic events, we expect them. There was no sense of panic or concern.”

Smith also has great confidence in the FMRP system which, he says, allows the reinsurer to play an active role in the business operations of its clients. “We have a very proactive system for responding to underwriting and claims management… Most reinsurers have a very broad clientele. Our relationship with our clients is very intimate. We are very much involved in their business practices.”

The 61 member mutuals who make up FMRP also supply its board members, allowing for instant communication, he adds. “Our ability to respond and react is accelerated.”

FMRP enjoys unique status as the only domestic insurer, Smith notes. “We can focus and concentrate on Canadian issues. We don’t have the distraction of international markets or dealing with foreign parents who are maybe not clearly familiar with Canadian issues.” Many global reinsurers tend to lump Canada in with the U.S. and the challenges that market faces, despite the vast differences between the countries.

But Smith says FMRP is well-regarded by the international reinsurance market due to its intimate knowledge of its clients’ exposures, which means that the program “doesn’t tend to have surprises” in terms of its claims payouts. “The reinsurance market we buy through for our capacity is very stable, very supportive. They feel confident of our stability.”

BUYING POWER

The basic function of FMRP is to bring the aggregate retentions of its member mutuals up to a level that is attractive to reinsurers. Smith says the program allows those retentions to reach $1 million, giving clients access to limits of $10 million for liability, $6 million for property per risk and $120 million for catastrophes.

A single mutual with maybe $50,000 in retentions would face severe limitations heading out by itself into the global reinsurance market, if it could even get a foot in the underwriter’s door. “We provide the retentions for those companies to access international reinsurers,” Smith explains. “This provides an extraordinary opportunity for companies with limited retentions.”

The reason FMRP has had such success in marketing its programs is its close relationship with member mutuals, he stresses. Smith’s 28 years experience in the industry, specifically with the underwriting of integrity programs, has served him well at FMRP, where the nature of clients’ business has shifted considerably. Mutuals were once known largely as writers of farm coverage, but this portion of the business has now dropped to about 40% of premium. Auto, on the other hand, has grown substantially and now represents about 40% of premium. Mutuals have also grown their small commercial books of business. Overall, mutuals have taken on greater risk, with gross written premiums rising from $324 million in 1997 to $525 million last year.

FMRP is able to support this kind of growth in volume and product because of the control the program has over its clients’ exposures. The plan provides underwriting services, such as assisting mutuals with auto rate filings and commercial lines underwriting, and claims management expertise. Owing to this, Smith also expects his staff to grow considerably, topping 40 by the end of this year.

And with the movement of mutuals into auto insurance, even into larger, more metropolitan areas, Smith has been able to put his background in fraud control to good use. Kingsway General, and Smith as its COO, became renown for their hard-line stance against fraud, and he says he now finds many mutual owners seeking best practices in this regard.

Like its member mutuals, FMRP has also spread its wings. While the bulk of membership still comes from Ontario, the program now has clients across Canada. It is also involved in crop insurance programs in Ontario, Manitoba and Saskatchewan. And there has even been some movement into the U.S, where broker Guy Carpenter has facilitated FMRP taking on a share of treaties for small mutual insurers there. The U.S. business is solely a means to drive income to better serve FMRP’s core membership, Smith explains.

FUTURE VARIABLES

Looking forward, Smith sees many issues continuing to challenge the insurance and reinsurance industries.

He perceives that the record U.S. hurricane activity of 2004 may force reinsurers to maintain rate discipline even in the wake of strong results and moderate rebounding in investment markets. “There was the potential for more softening than there is likely going to be. Rates are probably going to hold or even see a small increase,” he says. There is also a great deal of uncertainty about the possibility of another international terrorist incident and what impact that may have on insurers, specifically if the stock market were to drop off significantly, as after 9/11.

On the primary insurance side, auto remains “a house of cards”, in Smith’s words. Despite massive reforms in most private market provinces, insurers have yet to really deal with many of the systemic issues in auto. The industry has had a hiatus from the public submitting claims, brought on by the fear of rate increases, he comments. And it remains to be seen whether there will be a rise in personal injury payouts sought in Ontario as the year-long moratorium on cash settlements imposed by Bill-198 ends. “The tort situation is on the brink of exploding.”

With this kind of doubt surrounding the future of auto claims growth, insurers can ill afford to see premiums decline, Smith stresses. “The fear is you’re going to start seeing rate reductions now. FSCO (the Financial Services Commission of Ontario) will resist rate increases and they’re going to be necessary because I believe it [the claims situation] is going to deteriorate.”