Shifting Ground

At the beginning of 2008, Canada’s primary insurers were starting to report rising loss ratios and other signs that this year might not be as prosperous as the past two years have been. And then, in mid-September, the financial markets in the United States bottomed out, leaving the more highly-leveraged insurance companies in the States declaring massive write-downs related to subprime mortgages.

In Canada, insurers and regulators say the industry on the north side of the 49th parallel have been much more prudent in their investments than their counterparts in the United States. And so while some fallout in Canada is expected from the U. S. market meltdown, no one is able to say specifically what kind of impact that might be.

Not surprisingly, the volatility of current market events is top of mind for many Canadian insurers these days. Many are calling on the industry to batten down the hatches in these tough times and make sure the fundamentals are taken care of — i. e. good relationships with broker partners, solid underwriting that stays the course and premium pricing that properly reflects the risks being underwritten.

The discipline and resolve of our industry is being put to the test once again. If our performance in recent challenging times is any indicator, there is reason for concern about our ability to get through this period with our financial health and reputation fully in tact.

1 Kathy Bardswick, President, CEO, The Co-operators Group Ltd.

Results across all product lines had already been deteriorating for some time before the investment climate unexpectedly eroded revenue further. It is a difficult time for this industry and many others. Rate adequacy needs to be addressed. At the best of times, this is a sensitive and risky proposition. But in the current economic environment, we can expect rate increases to generate rising levels of scrutiny among stakeholders.

The knee-jerk reactions our industry exhibited when faced with comparable challenges five years or so ago must not be repeated. Our reputation and credibility is only now beginning to solidify following the low point of a few years ago. By taking a measured approach to addressing our deteriorating results, we can manage our way through the turbulence ahead while continuing to build upon the progress the industry has made over the past few years.

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

The year 2008 will forever be recorded in history as a year of global volatility. Damage to the economy has been fast and it went deep, wiping off the map companies that had been successful for more than 150 years. As the world faces recession and we contemplate the lessons to be learned from the past year, I am optimistic about Canada and about AXA’s preparedness to face a new environment together with our brokers.

At AXA, we are staying the course on our ambitious path and we need to maintain a strong broker channel to accompany us. We will invest in many areas to ensure that AXA does everything within its control to grow the market share of our brokers. We will continue to be a financial partner for brokers facing the consolidation of the network and planning for their succession. AXA will work to improve productivity to enable brokers to thrive in a single-entry environment and to maximize their efficiency.

The economic slowdown will have an impact on consumers. It will require that we adapt and respond to the changes ahead of us. AXA’s culture enables it to innovate, react swiftly and to be flexible, all the while being careful to maintain consistency.

Our insurance market has always followed cycles. This time around, the length of the recovery of the global economy will play a large part in the depth and length of our next industry cycle. Whatever the economic outlook, AXA is committed to remain available, reliable and attentive to the needs of our brokers and their clients.

3 Charles Brindamour, President, CEO, ING Canada

The unprecedented volatility of the capital markets over the past two months and the continued slow deterioration of the industry’s underwriting results will create additional pressures on its profitability for the year to come. With both their underwriting and investment profitability under pressure, insurers will most likely pay more attention to their pricing and underwriting practices.

Given the uncertainty brought about by the current turbulence in the economic environment, providing pricing stability and capacity will become more important. As a result, it will be imperative for insurance companies to proactively anticipate and identify market trends that affect their performance and react with discipline and celerity, thus avoiding significant price corrections over a short period of time. We should always keep in mind how consumers, brokers, regulators and legislators reacted a few years ago when we, as an industry, failed to react in an orderly fashion to the deterioration of our profitability.

As uncertainty sets in, consumers will assign greater value to their brokers’ advice and understanding of their needs, as well as the personalized service brokers offer. In times like these, broker entrepreneurs thrive and succeed by offering innovative and enhanced value propositions to their customers. As an organization, one of our key priorities will be to continue to support our brokers by providing capacity, enhancing our product offering, improving the quality of our services and developing with brokers new and innovative ways of doing business.

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

Every insurance cycle has an inflection point that is usually apparent only in retrospect. The extraordinary events in global financial markets, combined with a series of more traditional insurance market factors, may indicate we are seeing the market turn as I write these notes. Even the strongest companies are seeing some diminished capital capacity going forward. Many other insurers with less effective risk and investment policies have had their balance sheets materially and negatively altered by market declines and related impairments. If you combine these facts with a heavy hurricane season, reductions in reinsurance capacity through diminished hedge fund participation and, closer to home, a Canadian property and casualty industry generating single-digit returns for the first time in some years (and in all likelihood seeing reduced investment yields for the forseeable future), there are a lot of variables all pointing to a single conclusion — more rate is required.

When rates do harden, the most important issue will be for insurers and brokers to work together to demonstrate the value of their propositions and help their customers find practical solutions in tough economic times.

5 Andy Hall, President, Chief Operating Officer, CNA Canada

As 2008 comes to an end, we start 2009 with uncertainty not only within the property and casualty insurance industry, but with a lack of predictability about how the global economy will affect Canada.

Future market trends have been difficult to gauge, but we are already witnessing indicators of

a slowing economy: rising costs, reduction in manufacturing profits, a drop in the total value of building permits and higher prices for wheat, rice, corn and oil.

Although CNA Canada has enjoyed excellent results over the past few years, we recognize the challenges ahead and the need to continue focusing on our strategies to grow and remain profitable. In 2009, we will continue to proactively respond to the challenges ahead by concentrating our efforts on:

• maintaining undrewriting discipline, which has been our mantra here at CNA;

• maintaining close and strong partnerships with our distribution partners, by understanding the issues they face and providing solutions to minimize any negative impact;

• investing in new initiativ es to support our broker partners and helping them meet all the insurance needs of our mutual clients;

• rewarding and recognizing our talented team of experienced professionals who are a valuable asset to the company; and

• designing and offering products and services that provide significant opportunities.

We will focus on implementing our key business strategies for 2009, ensuring continual broker support and building an infrastructure that will enable us to make the right decisions and act appropriately under volatile market conditions.

6 Shaun Jackson, President, CEO, Kingsway Financial Services Inc.

As we look forward to the prospects for the industry for 2009, I think it is worth reflecting on the events of 2008. It has been quite a tumultuous year in capital markets and has been a challenging one for every financial services company in North America. Our industry is typically one that goes through cycles; of course one always hears that it is different this time, and usually it isn’t! Turns in the insurance cycles are usually caused by the insurance industry’s self-inflicted wounds, a consequence of over-zealous pricing caused by oversupply of capital, which comes back to bite the industry. In the last quarter of 2008, we are seeing declines in market value of invested assets; this has reduced the available capital for the insurance industry at a time when rates need to increase. If we look back to the last time we had a hard insurance market, it was caused by a confluence of events both internal and external to the industry.

Looking at where we are today, I can see several similarities between today’s events and events that created the last hard market. At present, we are experiencing deteriorating underwriting results caused by aggressive pricing and escalating costs. Premium rates have not kept pace with inflationary measures. In contrast, we have actually seen reduced pricing in many lines. We have seen a significant decline in equity market values and concerns over the credit quality in many corporate issuers, causing significant reductions in capital available to the industry.

I expect the latter part of 2008 and early 2009 to be turbulent times for our industry, characterized by continued overall deterioration in industry combined ratios coupled with uncertainty in capital markets. There is still a high degree of uncertainty in capital markets, but once this stabilizes and confidence returns, I am cautiously optimistic that we will see firmer market conditions in 2009.

7 Kevin McNeil, President, CEO, Gore Mutual Insurance Company

As Gore Mutual prepares for 2009, our 170th year serving Canadians, we are focused on delivering a new business model to help brokers significantly enhance their customers’ experience. Now more than ever, insurers and brokers must work together to understand the needs of clients, provide highly responsive service, and improve workflow efficiency.

Recognizing that response is a key indicator of client satisfaction, we support brokers so they can offer clients instant transaction capability and hassle-free service. Gore Mutual is aggressively developing technology designed to help brokers improve sales results, increase retention and earn more profit per policy. We are also committed to single-entry solutions through broker management system integration. Gore Mutual offers direct integration with Policy Works and comXP. Brokers using Power Broker, sigXP and CIM-Data have single sign-on and integrated policy inquiry capability through Nexisys.

At Gore Mutual, we are trying to be the kind of company brokers need, offering leading-edge technology paired with genuine personal service. We are prepared for the hard market and will continue to offer a stable Canadian solution. This is an excellent time for us to work together to highlight the value delivered by independent brokers and to strengthen the broker channel.

8 Ellen Moore, President, CEO, Chubb Insurance Company of Canada

The economic environment will challenge our industry during 2009. Canada’s strong and conservative banking system, general fiscal responsibility and strict regulation of insurer capital puts us in a position superior to that of the United States. There could still be disruption in the marketplace from consolidation, business mergers or defaults due to the credit crisis. It might be more important than ever to evaluate an insurance company based on its financial strength, including knowledge of a company’s investment portfolio. Our investment portfolio has zero direct exposure to sub-prime mortgage-backed securities or derivative products such as collateralized debt obligations or collateralized loan obligations.

As always, balance sheet distress and deteriorating underwriting results should bring reason to the downward pricing. Excess capacity has led to broader coverage and lower prices. This may create significant issues for companies that did not practice proper underwriting discipline. We have made tough decisions to sustain our margins, and are well positioned to provide added capacity and new products in 2009.

Chubb sees significant opportunity during 2009 to enhance the strong relationships we have with our brokers. We look forward to working with all of our business partners in the coming year and wish them much success.

9 Rowan Saunders, President, CEO, RSA

A number of issues will be high on the radar of property and casualty insurers heading into 2009, but I believe the key focus will be the transitioning of the market cycle.

We are already seeing evidence of looming changes: capital positions within the industry, reinsurance losses and investment yields have already been affected. A decrease in investment income will undoubtedly lead to a greater focus on underwriting profit by shareholders.

A market transition does not happen without its challenges. We have learned from previous cycles, during which concerns were expressed about broker instability, inconsistency in underwriting appetite, lack of capacity on more complex or grey accounts and service level slowdowns with the remarketing of business. In addition, unanticipated price increases led to decreased confidence by consumers and political intervention.

The industry has struggled to successfully manage the cycle in the past. Heading into 2009 there is opportunity to get things right.

At RSA we will continue our prudent investment strategy and remain well capitalized, allowing for room to grow. We will also be making sure we are responding to early trends instead of waiting until more severe underwriting actions are warranted.

Providing brokers with preemptive education will also be key, and we’re already working hard to explain our rate management strategy to our broker partners, as well as using education programs like our Making Partner Program to examine and discuss changing market dynamics.

10 Robin Spencer, President, CEO, Aviva Canada

Firstly, I would like to applaud everyone in the industry who stepped up in 2008 to assure consumers of the strength of our industry during these uncertain times.

During the past year, we launched our “change insurance” campaign because Canadians told us insurance is too complex. So far we’re excited by the reaction from consumers and brokers alike, and I assure you that our mission to change insurance for the better is just getting started — stay tuned.

Product innovation, technology investment and succession financing will continue to be important to the broker channel in 2009. Ultimately, Aviva will differentiate itself through its long-term relationships and consistency of underwriting support though the cycle.

Brokers have recognized Aviva as leaders in the commercial lines market and we will build on this with continued product innovation. In personal lines, our investment in technology will drive efficiencies and prof itability for brokers.

Aviva’s commitment to the independent broker channel will continue in 2009, including the support of brokers who wish to grow their business or investigate succession planning. We are steadfast in our belief that insurance company ownership of brokerages is not right for consumers or the broker channel in the long term.

Lastly, as a new IBC Board member, I look forward to working with other industry leaders in tackling our biggest issues, including product reform and insurance to value.

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

For the past couple of years, consumers, brokers and insurers have benefited from and enjoyed a stable and sound marketplace. Unfortunately, 2008 has brought with it some all-too-familiar problems — and some not-so-familiar problems — that threaten this stability.

Loss frequencies and severities have increased again this year and the financial meltdown has wreaked havoc on investment returns. Yet some companies continue to reduce rates, forgive tickets and accidents and pay inflated overrides to acquire books of business.

Pembridge has been a leader in the industry by clearly outlining what actions we were going to take in order to brace and position ourselves for the bumpy road that is ahead.

First, Pembridge has been only one of a very few companies that have consistently articulated our support and commitment to work with brokers and broker associations that promote independence.

Second, we have maintained a sound underwriting discipline so that consumers insured with Pembridge today do not end up on the street when the hard market is finally upon us.

Finally, Pembridge has introduced small rate increases. Pembridge has maintained that small, measured rate increases today will stave off larger increases tomorrow. Looking to 2009, I strongly expect this trend will continue so that brokers and consumers are not victims of ‘rate shock.’

It is inevitable that we will be faced with the challenges of another hard market. But I am confident that the steps Pembridge has taken and the initiatives that have been implemented will enable our broker partners and us to grow and prosper together.

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“The knee-jerk reactions our industry exhibited when faced with comparable or so ago must not be repeated.”

Kathy Bardswick, The Co-operators

———

“With both their underwriting and investment profitability under pressure, insurers will most likely pay more attention to their pricing and underwriting practices.”

Charles Brindamour ING Canada

———

“If you combine [the U.S. market volatily] with heavy hurricane season, reductions in reinsurance capacity through diminished hedge fund participation and, closer to home, a Canadian property and casualty industry generating single-digit returns for the first time in some years, there are a lot of variables all pointing to a single conclusion — more rate is required.”

Alister Campbell, Zurich in Canada

———

“Turns in the insurance cycles are usually caused by the insurance industry’s self-inflicted wounds, a consequence of over-zealous pricing caused by oversupply of capital, which comes back to bite the industry.”

Shaun Jackson Kingsway, Financial Services Inc.