Rate, Risk and Reputation

It was not hard to figure out what was on the minds of most attendees at the CIP Society’s first “Emerging Issues in Insurance” symposium, which was recently held in Toronto. As the industry emerges from one of the hardest markets on record, attendees were keen to identify the trends, challenges and opportunities facing brokers, insurers, reinsurers and consumers alike. Specifically, the future direction of market pricing and the sustainability of industry profitability were foremost on their minds, closely followed by how insurers can avoid the volatile effects of the market cycle. And, not least of all, the attendees saw the need to improve the insurance industry’s public image as high on the priority list of issues confronting the industry today.

Nicholas Smith, president of Lloyds Canada Inc., emphasizes the need for insurers not to be overtaken by celebrating the industry’s recent return to profitability and in the process becoming lax on rates. In particular, he notes that the p&c insurance industry’s five year return on equity (ROE) between 2000-2004 averaged a mere 8.1%, a return which pales in comparison with other major profit-based corporations such as Loblaws (which produced an ROE of 18% over the same period), Royal Bank (with a 15.9% ROE) or McDonalds (with a 15.6% ROE). “The industry needs to improve its performance,” Smith stresses. “This has to come from underwriting, not investment.”

Constant claims threats from the tort system and issues like asbestosis mean that insurers cannot be complacent about how they view risk, Smith observes. “Risk and how it is changing must be understood,” Smith says. “Risk must be assumed on the right terms and conditions.”

PUBLIC IMAGE

Getting the price to cost formula correct was a point reflected in a panel session of industry CEOs, brokers and regulators. Brian Gray, president of Swiss Re Co. Canada, says insurers are “sometimes remarkably unsuccessful” at pricing products correctly and matching rate with risk. “We continue to have situations where front-line underwriters are pricing the product without understanding how much margin is in that product. It leads to an environment where sometimes people wind up writing risks and say, ‘let’s see’ and then 18 months or two years later we find out whether that risk was priced right,” he adds. And, he points out, “this inevitably leads, as we know, to a continuous correcting and overcorrecting and the creation of insurance cycles. “Those cycles do not engender good reaction among the public.”

The issue of the industry’s tarnished public image resonated throughout the symposium, with even luncheon presenter Donald Cooper, making reference to it. “The simple truth is that people buy ‘stuff’ to make some of their stress go away,” Cooper argues. “So, our only value to any other human being is our ability to make some of their stress go away.”

This point struck home for Kathy Bardswick, president of The Co-operators General Insurance Co. “That is absolutely true in our industry,” she says. “I conclude that we are not reducing fear or stress for customers. And that applies whether it is the auto client who doesn’t want to put a claim in, the commercial client who no longer understands what terrorism coverage is, or the homeowner who walks away shaking his or her head after we explain water damage coverage. My suggestion is that we return to the basics and think about the values we add to our community,” says Bardswick. “Are we adding to the fear and stress or are we actually reducing it?”

This message applies equally, if not more, to brokers, says Greg Belton, president of HKMB International Insurance Brokers. “The combination of the extremely difficult market from 2001-2004, and all the adverse publicity from the investigation of industry practices by Eliot Spitzer, has moved our industry from under the radar screen to out in the public spotlight,” he observes. “This is increasingly causing us to answer to the buying public for what we do. I am confident that we will emerge from this as a more responsive, professional and accountable industry.”

Gregg Hanson, CEO of Wawanesa Mutual Insurance Co., says the industry’s public image issue is one of the “things that keeps me awake at night”. “The challenge, he asserts, is how you find out what consumers really want. “And, if we want to address the issue of consumer confidence, is it better to do it individually as brokers and companies or is it better to do it collectively? I suspect it is better that we do it collectively,” he adds.

COLLECTIVE PLAN

Mary Lou O’Reilly, vice president of public affairs and marketing at the Insurance Bureau of Canada (IBC), outlines the industry’s “collective” strategy of improving consumer confidence. With $1.8 million in seed money, the IBC is coordinating a consumer campaign that will focus on community outreach, road safety research and direct-to-consumer national advertising.

The “community outreach” component of the plan has already begun through a visible presence of IBC and insurers groups at North Bay, Ontario’s injury prevention month in February. Road safety research, specifically a novice driver distraction study, will be conduced through the University of Calgary. And, the IBC is also reviewing proposed concepts for national advertising. “There are three guiding principles of our campaign,” O’Reilly explains. “First, messages have to resonate with consumers. They also have to assist with government relations. And, third, the campaign is not a ‘made-in-Toronto’ one, it has to be regionally adaptable.”

An important element of the campaign is that industry messages involve not just consumers, but also regulators and government decision-makers. This is a point echoed by Hanson. “We have struggled with changing regulations in various provinces over the last 18 months to two years,” he said. “The challenge here is that we must establish effective and collaborative communication with regulators and politicians all the time, not just when the panic is on.”

From a government perspective, Grant Swanson, executive director of licensing and market conduct at the Financial Services Commission of Ontario (FSCO), says the industry’s focus on rates, transparency and consumer confidence “is aligned with discussions being carried on by regulators”. Swanson outlined five key areas of initiative that regulators are concentrating on in market conduct – corporate governance, quality of industry information, relationships between agents, brokers and insurers, point-of-sale disclosure and harmonization of rules for brokers and agents across the country.

DOOMED REPETITION?

A significant portion of the CEO panel discussion revolved around the issue of industry cycles. Staying the course of underwriting discipline in a softening market is, of course, easier said than done. The CEO panel was divided along the usual lines of optimism and pessimism when it came to the industry’s ability to prevent the pattern of cyclical over-correction. One of the sticking points is how the industry reacts to the so-called “claims bubble” of people and companies unwilling or afraid to report losses.

“I think this trend, which we have seen throughout North America, has been aggravated by the hard market,” Hanson comments. “The big question is will we return to a more stable environment if we can get the right communication out to consumers and restore confidence?”

The ever-present need for growth and sustained profitability often makes industry talk of responsible rate setting and sober risk assessment seem rather quaint. Market cycles are created not just by one firm, but several companies operating on the front-lines of marketing and underwriting. Robert Landry, CEO of Zurich Canada, summed it up in a question to the panel, “as an industry we are individually brilliant, but collectively stupid”.

In fact, the industry serves many masters – not just consumers and regulators, but another significant group – sharehol ders. The need to look at market conditions from more than one point of view is an issue that Philip Cook, CEO of Omega Insurance Holdings Inc., emphasizes to the symposium audience. “As an industry, we have to find a way to balance the requirements and needs of these three constituencies – consumers, regulators and shareholders,” Cook concludes. “Because not always are [their] interests convergent – in fact, very frequently they are pulling against each other. Our job as an industry is to find a way to satisfy those three constituencies. We are experts in risk management when it comes to managing the risks of our customers, we need to become experts in managing our own risks as an industry.”