The Group Factor

For a relatively small part of the property and casualty insurance marketplace, group insurers maintain a disproportionate sphere of influence. Many standard insurance carriers have viewed the established, niche players in the sector, and their solid results, with envy.

In the 1980s and 1990s, several companies started group branches or bought operations, with varying results. In addition, group business has changed hands frequently through waves of mergers and acquisitions over the past ten years. Today, there is intense competition among a handful of markets for well-defined employer and association programs.

Some say this heated competition is good for valid group and association business, creating more consumer choice, stable prices and high levels of service for defined client segments. Others say in the previous decade it led to an unwanted flurry of so-called “synthetic groups” that were created mainly to grab marketshare. Either way, the environment has evolved considerably since the Financial Services Commission of Ontario (FSCO) brought in guidelines for group underwriting in 1994 – the first of their kind in Canada. As such, many in the industry now argue that “market dislocation” caused by synthetic groups has faded away.

TRUE GROUPS?

“There was some vagueness that entered the affinity market during the late 1980s and 1990s,” admits Natalie Dupuis, vice president of underwriting for HB Group, which has written programs for 25 years. “There likely was some misconduct and it may still be occurring today, but on a much smaller scale.”

Jean-Francois Chalifoux, senior vice president at The Personal Insurance Co. of Canada, notes that any synthetic groups left in today’s market are likely holdovers from the pre-1994 era. “I don’t think any of them have been successful,” he says. “There is really nothing stopping a company from doing a loose marketing or affinity program, but you won’t get two customers on the street making a true group, with a competitive rating scheme.”

Brokers in Ontario have been the most vocal critics of certain kinds of group marketing schemes. “We have absolutely no problem with legitimate groups,” says Bob Carter, chief executive officer of the Insurance Brokers Association of Ontario (IBAO). “But, there are some exceptions that we find disturbing. It takes a long time to investigate some of these ‘groups’ and come to the conclusion that they are not legitimate. And then you get market dislocation, in which customers have to be relocated to the general market. A lot of people also forget about the original ‘dislocation’, which is that the business was moved from a local broker.”

Chalifoux says some companies assumed that “these marketing ventures would generate a loss experience similar to true group programs. But, many realized this was not the case and they disappeared one by one during the market cycles.”

The recent hard market put an exclamation point ending to any marketing ventures designed to grow marketshare at the expense of profitability. Difficult conditions may also have prompted some group insurers to review their risk classifications and pay more attention to underwriting, according to Dupuis. ” I think some companies did go back to their knitting and look at underwriting rules and risk classification, just as the regular market did,” she says. “We have not strayed far from our group definition when it comes to employer groups – we have stuck with our risk profile.”

LOOSE AFFINITY?

Virtually all of the group insurers interviewed for this article emphasize that their focus is on well-defined groups consisting of employers, associations or alumni programs. These insurers argue that solid loss experience, homogeneous risk profile, focused target markets and a loyal client base are the keys to success for any group plan. Indeed, the term “affinity” has fallen out of favor with some group insurer representatives. “The term [affinity] is loosely used in this industry,” says Dupuis. “All groups have an affinity: the real question is whether it is a loose or strong one. And some people use the term to refer to ‘affinity partners’ that may offer complementary services.”

“The perspective of Traders [Insurance Co.] is to strictly critique new group submissions from our distributors,” says Maurice Tulloch, senior vice president at Traders Insurance Company. “Our focus is on employee and association based groups. Affinity business, while not completely unattractive, needs to demonstrate strong homogenous qualities amongst the membership for consideration.”

Canada’s group insurance market features a few carriers with a dedicated history of group marketing and a specialized, often direct response focus, such as Meloche Monnex, The Personal, and HB Group. All of them have provided group insurance for more than 25 years, and all are part of bigger insurance or financial services organizations.

Several traditional carriers have also branched into group insurance, either opening up group marketing subsidiaries or buying established operations. Many standard insurance companies offer group insurance through their broker networks, including Aviva (Traders), Economical (Waterloo), ING Canada (Novex), Lombard Canada and Royal & SunAlliance (Ascentus). Royal and SunAlliance also purchased Newfoundland-based The Johnson Corp. in 1997, a specialist broker operating in group insurance.

REG IMPACT

As with all insurance market conduct regulation, the rules for group insurance underwriting vary by province in Canada. With Ontario’s 1994 guidelines implemented by its then “Ontario Insurance Commission”, insurers were forced to follow specific criteria for writing group business and issue separate rate filings. These criteria include the condition that groups must have a signed sponsor.

In Quebec, by contrast, there are no rules for what constitutes a group, a regulatory environment Chalifoux calls the true “free market” model. Other provinces, such as Alberta, Nova Scotia and New Brunswick, have varying degrees of regulation around group constitution.

While the Ontario regulations are considered overly strict by some observers, others view them as simply a “first cut”. “The FSCO guidelines are a starting point. We then look at the risk profile, our underwriting appetite and the quality of the business,” observes Shawn DeSantis, vice president, personal insurance at Royal & SunAlliance. “We are quite careful about the groups we write.”

NEW COMPETITION?

Some, such as Carter, say activity in the group market “seems to be pretty calm right now”. But, the established carriers see a fight for continued growth, intense competition and a potential influx of new players as industry pricing and terms relax. “We have experienced tremendous growth of 33% over the past year,” comments Jean Lachance, chairman, affinity market group for Meloche Monnex, the largest group insurer in Canada (which forms part of TD Financial Group). “Our target for the end of this year is to hit $1.75 billion in written premium volume.”

Meloche Monnex is just one of many group insurers that has seen its parent company change over the years – from London Life to Canada Trust to TD Bank. In 2000, Meloche Monnex acquired the group business of Canada Life Casualty and in 2004 it bought the p&c business of Liberty Mutual. Today, it operates under two principal brands – Meloche Monnex and “TD Insurance Home and Auto”. It provides home and auto insurance services to members of professional and university alumni organizations, select employer groups and the public. Lachance says that, while some of the company’s growth has been by virtue of acquisition, much of it has been organic. High customer retention rates of 94% also help to keep business on the books, he adds. “Basically, we look for associations that are very homogeneous from a risk profile, such as chartered accountants or architects,” Lachance says. “Usually these professional gr oups produce a much better loss ratio. And the lower claims costs, combined with our 19% expense ratio, justify the premium discounts we can provide.”

The Personal is another company that has seen its parent change hands, with the sale of CIBC Insurance’s business to Groupe Desjardins in 2001. It writes more than $580 million in premium volume through over 600 groups across Canada. Chalifoux says The Personal has also experienced rapid growth and customer retention numbers in the 95% range. “We have developed our own group criteria, regardless of where the industry market cycle is,” he explains. “We want to be consistent and draw a sharp distinction between true group programs and mass merchandising programs. We don’t change our targets or relax our standards with the cycle – we look at it more in the long-term.”

Dupuis says the main focus of HB Group, a subsidiary of The Co-operators, is on employer programs, which account for about 90% of its 300 groups. “I think group is just a way to market and structure your pricing,” she says. “Because it is optional for employees to buy auto or home insurance, access to the employer or sponsor is crucial. You have to find ways of getting greater participation and marketing to the individuals within groups. The employer doesn’t simply throw a list at you.”

Several sources say they envision more competition ahead in the group market. “We have seen more companies wanting to get in to this market, especially over the last 10 years,” notes Lachance. “I think this market will become more competitive, but it’s not easy to enter. There are a whole range of issues, such as program loyalty, high technology investment costs and service models for large groups of people, which insurers have to take into account. The first one in has a big advantage.”

Others argue that the game is big enough for a multitude of players. “Group business has become more of a marketing advantage rather than an underwriting or risk selection advantage,” says DeSantis. “It is used to get a foot in the door, and I think in the Canadian marketplace there is room to grow. We still see different groups coming to us.”

Tulloch, who also predicts more interest in the group market from competitors, says that “the barriers to entry are greater than the regular retail market. This is evidenced by the loyalty large employers and professional associations show to their markets.”

For Chalifoux, the role of the plan sponsor “changes the whole dynamic of the relationship. Here you have someone representing a large amount of people and he or she becomes, in effect, a stakeholder of our industry. The more successful the p&c program is, the more successful their plan can be.”

COLLATERAL BENEFITS

Another issue that divides some standard carriers from group insurers is collateral benefits – or the use of existing “first-payer” employer or association insurance plans that could reduce the claims exposure of insurers. It is a potentially attractive rating tool to provide discounts, and a bone of contention for some regular carriers, who argue that access to this information provides group markets with an unfair competitive advantage.

Group insurers acknowledge that they use collateral benefits as part of their rating schemes, but emphasize it is only one factor. Tulloch says “the characteristics demonstrated by certain groups, or collateral benefits, present a section of the market that deserves improved pricing due to the lower expected loss costs of the group.”

Dupuis says, “if collateral benefits reduce the severity or frequency of claims, then it should result in reduced costs, which are passed along to customers. We still use many other elements in our rating criteria, but that is one and it does impact pricing. I don’t think the impact of collateral benefits or the volume of the discount is as great as people think it is.”

Chalifoux cites the Quebec experience, where for bodily injury, there are no collateral benefits due to the structure of the insurance product. “We are still very successful in Quebec without this so-called ‘major advantage,” he says. “The success of any group program really comes down to the risk profile, the better price-to-quality ratio, and the positive customer experience.”

FUTURE STABILITY?

While supporting competition, Carter says he does not want a return to the kind of environment in the late 1990s in Ottawa, where several group programs for federal government employees were disbanded. The former group members went from preferential pricing to higher rates in the regular market – a move that spawned the creation of the consumer advocacy group “CFAIR”. “This is still an issue for us,” Carter says. “FSCO does have its guidelines, but whether they work or not really depends on who you talk to. In my opinion, there are some loopholes there that you could drive a truck through.”

Lachance, a former president of Quebec’ broker association, says, “our service model is a threat to other ways of offering business, such as brokers. We are taking business from one channel, and brokers clearly do not see this from a favorable standpoint. I think we are putting pressure on the marketplace to be more competitive.”

Chalifoux argues that Quebec’s free market model of unfettered competition should be the standard for the group insurance sector. “I do not believe as an industry we should be seeking more and tighter regulatory guidelines,” he says. “We should allow insurance premiums to be set by risk and competitive forces.”