“Kick-Starting” Competition in B.C.

Despite having “substantial experience with hard markets”, the current underwriting environment has presented a unique combination of challenges for insurance brokers in that not only have cover prices risen dramatically across-the-board, but underwriting capacity has been difficult to attain, observes David Keen, the incoming president of the Insurance Brokers Association of British Columbia (IBABC) for the 2003/4 term. “With 40 years in this business, I haven’t seen a marketplace quite like this one, with insurers who can’t write new business, insurers who don’t want renewals, and everything in between.”

With IBABC having renewed a “five-year accord” with B.C.’s crown insurer the Insurance Corp. of B.C. (ICBC) on conditions of distribution of basic auto insurance, which has provided a certain sense of stability within this particular line, the association is turning its attention to the openly competitive commercial marketplace where capacity and delays in processing cover applications have become problematic, says Keen. Among his top priorities as association president in the year ahead are:

Meet with the IBC (Insurance Bureau of Canada) to discuss the commercial market and how, from a broad perspective, brokers and insurers can work together to resolve the issue of attaining cover; and

Meet and discuss with insurers on how to reduce delays in the quoting on commercial business, as well as establishing a workable solution to earthquake deductibles and premiums.

Furthermore, Keen highlighted the importance of interaction between IBABC and its sister broker associations, specifically the national umbrella body the Insurance Brokers Association of Canada (IBAC). “IBAC has been lobbying in Ottawa on behalf of insurance brokers across this country. Indeed, the banks would undoubtedly be selling insurance over the counter by now if it weren’t for IBAC. We must continue to support IBAC in this work.”

Keen also drew attention to association membership, observing that there are many brokerage firms operating in B.C. who are not members. He suggested that such firms have indirectly benefited from the efforts of IBABC, but “their day will come”. Notably, fruition of the Centre for Study of Insurance Operations (CSIO) intranet portal linking brokers and insurers through real-time processing, should enhance the attraction of broker association membership, he adds. “Hopefully, the CSIO portal will make membership a must!” In this regard, Brian Gilbert, the current president of IBAC, told attendees of the meeting that “we [IBAC] continue to deal with frustrations in getting the CSIO portal up and running across the country. Significant changes were recently announced by the CSIO in terms of future development of the intranet portal. Despite the many setbacks that have been experienced with the portal’s development, Gilbert notes, “the role of the portal will greatly enhance the broker position”.

AUTO COMPETITION

One of the biggest projects IBABC is working on is increasing competition in the optional auto market, says outgoing president Don Ungaro, who will remain on the association’s board of directors as chairman in the year ahead. IBABC has met with the provincial authorities in order to facilitate increased competition in this arena – which was one of the “election pledges” presented by the new Liberal Party government. In conjunction with this effort, the association is also involved in discussions with both ICBC and private insurers to establish a groundwork plan toward bringing about renewed competition. “There are currently a relatively few number of [private] companies offering this product [optional auto] for various reasons.”

Notably, the recently renewed “five year accord” with ICBC provides greater clarity on what brokers can offer in the optional auto market, Ungaro observes. “…it acknowledges our right and ability to fairly offer competing products for optional auto insurance”. Furthermore, the new ICBC accord has seen a reduction in fees brokers pay on business made through credit card transactions, which the costs of will now be transferred to the crown insurer similar to broker arrangements with private insurers, he adds.

CYCLE CONTROL

In a presentation made at the IBABC conference, Lloyd’s Canada Inc.’s attorney in fact, Nicholas Smith, drew attention to the current “perilous state” of the Canadian property and casualty insurance industry. Despite the surge in cover pricing over last year, which saw direct written premiums across the country rise by 23%, the industry remains under extreme capital and cost pressures, he notes. Specifically, he points out that insurers had to make reserve deficiency “top ups” of around $750 million for 2002, while claims cost continues to grow annually at about 16% – without any major catastrophe-related expense having occurred last year. “…it becomes clear that we’re now operating in uncharted waters – waters which some think are perilous”.

As such, Smith suggests that not only have underwriters dug themselves into a deep hole as a result of the previous soft market, but that the “risk environment” has changed with emerging perils through terrorism, mold, corporate governance and overall greater tort exposure. “Consider the U.S. for the moment: the cost of the U.S. tort system, currently estimated at US$198 billion per annum, is set to rise to US$298 billion by 2005. That’s a staggering 51% increase over three years. It will then represent 2.4% of U.S. GDP [gross domestic product] – more than enough to finance the liberation of several Middle East countries. Things aren’t that bad in Canada – not yet anyway. Tort costs are 0.8% of GDP, but provinces opened up to class actions last year, and claims costs were up an extraordinary 16.7%.”

Smith attributes much of the industry’s current problems to the “prevalent mindset of the inevitability of the insurance cycle”. The view that the industry will always be subject to spurts of “hard” and “soft” markets which have to be endured, has become a “dangerous mindset” in relation to the significantly riskier underwriting conditions of today, he notes. “Against this background, in these conditions, a ‘blind faith’ that the turn in the cycle and a couple of years of hard market conditions will allow us to patch our wounds and restore our health and mean that we can get back into the ring and take our blows in the next soft market is just that – blind faith.”

While the solutions to the industry’s financial problems may seem obvious – in taking appropriate and timely underwriting action – the real problem lies in what Smith calls the “wrong mindset” – being that the insurance cycle dictates market conditions rather than insurers having ultimate control. “I think the clear lesson from what we are observing in 2003 is that we are now in a new situation, and that demands a new response from our industry. And that response is to challenge the very notion of the cycle itself.”