The View Ahead

13th Annual Property & Casualty Crystal Ball (Toronto) 

CW Consulting recently held its 13th Annual Property & Casualty Crystal Ball in Toronto. Telematics, weather-related catastrophes, Ontario’s mandated 15% auto rate reduction, low interest rates and the housing market were all hot topics at this year’s event, held at the International Plaza Hotel near Pearson International Airport.

Speakers this year included Alister Campbell, chief executive officer of The Guarantee Company of North America; Randy Carroll, chief executive officer of the Insurance Brokers Association of Ontario (IBAO); Fabian Richenberger, president of Northbridge Insurance; Paul Fletcher, senior vice president of strategy for Aviva Canada; and Robert Kavcic, vice president and senior economist at BMO Financial Group.

USAGE-BASED AUTO INSURANCE

Telematics is going to change the way auto insurance is offered and the vehicle-monitoring technology will give brokers opportunities to offer advice to consumers, according to speakers at the Property & Casualty Crystal Ball, held January 23 at the International Plaza Hotel.

Two speakers at this year’s event reported that they are participating in telematics pilot programs, in order to monitor reports on their own driving habits.

“Telematics is going to change everything,” said Alister Campbell, chief executive officer of The Guarantee Company of North America, to a room full of brokers and other insurance professionals. The “full extreme version” of usage-based insurance is “basically a utility. It’s how you drove, how far you drove and what kind of events happened while you were driving, week by week and month by month,” Campbell added. The role of the broker in telematics programs, he said, is “not clear” to him. However, Randy Carroll, chief executive officer of the Insurance Brokers Association of Ontario (IBAO), did offer some predictions.

“Telematics is going to change our world in 2014,” Carroll said during the event. “You have to … help the consumer understand that product and in order for them to understand that product, you have to understand … how it works. It actually affords you the opportunity to go back to the basics of underwriting, from a different perspective, and become an educator for the consumer versus having the conversations that you have had over the past two years, talking about black box underwriting, having no idea how the policies have been underwritten, or how rates have been determined.”

Carroll noted IBAO executives have been beta-testing telematics.

“I would massacre myself if I moved over to a telematics,” he quipped. “Out of whole test group, I am the person with the most frequency and severity of braking.”

Campbell is also involved in a telematics pilot, involving 30 members of The Guarantee’s senior management team and board.

“A lot of my ‘dangerous’ rating on the pilot we are doing is because I am not driving 100 (kilometres per hour) on (Ontario Highway) 401,” said Campbell. “I’m going to want a usage-based pricing model, but I want one that recognizes my characteristic of 30 years with no accidents.”

ONTARIO AUTO

Alister Campbell, chief executive officer of The Guarantee Company of North America, was back for the 13th Annual Property & Casualty Crystal Ball, held January 23 and produced by CW Consulting. At last year’s event, Campbell noted, he talked about the “de-globalization” of the Canadian insurance industry, referring to the fact that two-thirds of the p&c market in Canada is comprised of Canadian-owned firms, whereas in the mid-1980s, two-thirds of Canadian carriers were foreign-owned.

The exit from Canada of foreign insurers has been caused, in part, by the Ontario government’s auto insurance regulations, Campbell suggested, referring to the January 14 announcement by Levis, Quebec-based Desjardins Group of its agreement to acquire the Canadian businesses of Bloomington, Illinois-based State Farm.

“I feel the Desjardins deal just kind of re-affirmed exactly what I was arguing,” Campbell said, adding he has presented theories in the past “as to why foreigners were fleeing and Canadians were buying, and one of those was Ontario regulation around auto and I think we all would probably agree that that theory is the largest single likely explainer of the transaction that just took place.”

In 2013, the Ontario government established an industry-wide target reduction, by 15% over two years, of the “average of the authorized rates that may be charged by insurers” for private passenger auto.

During his presentation, Carroll predicted there will be a provincial election this spring.

“The rate reductions that we’re going to see … are bearable,” Carroll said. “The government can actually stand up in front of their constituents and say, ‘We have lowered the rates in the province, on average, by four and a half per cent, and we’re on our way to delivering our promise of an 8% reduction in August, and we will deliver another 7% reduction in the next year, but we can’t do it unless we are re-elected,” he told attendees. “They are looking to get re-elected as a majority. The risk in all that is, if they are re-elected in a majority, I think there’s a lot of wiggle room on that mandate. But if they get re-elected in a minority position, the wiggle room is gone and we are in deep (trouble),” Carroll predicted.

Fifteen per cent “is going to come off the rates, on average, one way or another,” said Paul Fletcher, Aviva Canada’s senior vice president of strategy, who noted “not many of us are making that much money in Ontario auto.”

Aviva has made several proposals to the government on how it could reduce claims costs, Fletcher said, adding that Ontario auto “needs a new product.”

For example, Aviva proposes that the government “match the tariffs” – for medical costs in auto insurance – with those of the Workplace Safety Insurance Board and the Ontario Health Insurance Plan.

PROFITABILITY AND INTEREST RATES

The combined ratio for Canadian property and casualty insurers exceeded 100% as of the third quarter of 2013, interest rates will continue to be low for at least another 20 months and the increased frequency of severe weather means insurers need to hike their rates, speakers suggested at the 13th Annual Property & Casualty Crystal Ball.

“2013 has been another year where the industry suffered serious losses as a result of weather,” said Northbridge Insurance president Fabian Richenberger, referring to the floods last June in southern Alberta, the July 8 rain storm in Toronto and the ice storm last December that brought down tree branches all over Toronto.

“The loss ratio on personal lines and business lines has deteriorated significantly” due to “weather-related losses,” Richenberger said.

“I think it’s evident that the rates have to go up because we cannot absorb these types of losses without adjusting the premium base,” he added.

Insurance companies need “to do a better job” of getting policyholders to use preventive measures – such as sump pumps, backwater valves and hail-resistant building material, Richenberger suggested.

He added about $170 billion worth of municipal infrastructure in Canada “is in a state of poor maintenance and repair.”

Richenberger noted that as of the third quarter of 2013, the combined ratio in Canadian p&c was 100.8%, which was the “first time in many, many years that the combined ratio”exceeded 100%.

“The profitability of the industry has to improve overall because combined ratios of 100% and above are just not sustainable,” he said.

On top of that, interest rates are going to stay low at least another year, another Crystal Ball speaker suggested.

“We are still probably a good year and a half to two away from the Bank of Canada or the (U.S.) Federal Reserve raising interest rates,” said Robert Kavcic, vice-president and senior economist at BMO Financial Group. “I think it will probably be the third quarter of 2015 when the Bank of Canada will raise interest rates.”

Canada’s gross domestic product will grow by 2.5% in 2014, Kavcic predicted, adding the housing market will not crash.

“It’s almost like a national pastime in this country to be bearish on the housing market,” he said. “You can’t open up a newspaper anymore in this country without wanting to sell your house and move into a basement apartment somewhere. The reason this crash that everybody’s talking about isn’t coming is because the fundamentals are actually pretty sound.”

For example, Kavcic noted, there are 185,000 homes built per year in Canada, and census data indicates there needs to be 180,000 new homes.

“The bottom line is we are right in that range where homebuilders are building essentially what we need to satisfy demographic demand,” Kavcic said. “The kicker is, if we were to get a two-percentage-point increase in mortgage rates overnight, then we would be talking about a situation where home prices would have to correct to maintain affordability. We are not going to get a two- percentage-point increase in mortgage rates overnight.”