Attendees to the 6th annual edition of NICC in Quebec City from September 30 to October 2 received new insights on the many established and emerging issues currently facing the insurance industry: from regulation to consolidation, crime, technology and financial innovation. The only constant may be change, meaning industry players would be well-advised to be prepared.
CONSOLIDATION NEARS LIMIT
The head of Quebec's financial regulator told the industry crowd at NICC that there appears to be little opportunity for more mergers and acquisitions in the province's property and casualty insurance industry following some recent M&A activity, including three major deals.
The consolidation level in Quebec's p&c market is nearing its critical threshold, Mario Albert, president and CEO of the Autorité des marchés financiers (AMF), told delegates.
Albert commented that, in general, Quebec's p&c market is performing well, but increased concentration is a concern since it could serve to limit consumer choice and competitiveness. He pointed to the "fairly significant" impact of Intact Financial's acquisition of AXA Canada and, more recently, JEVCO Insurance Company, and RSA Canada's purchase of L'Union Canadienne.
Five main players now represent 59% of the market share in Quebec (when measured by direct premiums written), Albert reported.
He cited the Herfindahl-Hirschman Index, a measure of market concentration. For Quebec's market, a level of 1,000 or below represents an acceptable unconcentrated market. Quebec is currently at 1,050, he noted, meaning above the threshold and getting to a concentrated level.
Another challenge for AMF going forward will be how best to regulate insurance distribution online, especially with its potential for security problems and fraud, Albert said. Strong security practices already exist in many cases, he told delegates, and added that banks have best practices that could be applied to other companies.
Still, a major challenge will be to implement a regulatory framework quickly enough to prevent the province from having to play catch-up with developing conditions, or possibly worse, having to create regulations to correct problems later.
An additional challenge for the regulator will be to ensure that licensed agents maintain their important role when more insurance business is done online. The AMF expects to continue its efforts to develop a compromise for industry professionals who have concerns their incomes are threatened by the online world, he said.
The Office of the Superintendent of Financial Institutions Canada (OSFI) reports that the results of its analysis around the capital framework review, as well as a quantitative impact study analysis, are expected to be published for consultation in December.
The findings are the result of the second phase of OSFI's capital framework review, which consists of a review of the definitions of capital and of insurance, credit and market risk factors, and an explicit recognition of risk aggregation and operational risk, state the 2012 NICC presentation notes delivered by OSFI superintendent Julie Dickson.
The first phase of the review was completed with the introduction of the 2012 Minimum Capital Test (MCT) guideline, Dickson said. "The industry will have an opportunity to assess the capital impact of all these initiatives," she told conference delegates, "in addition to commenting on the draft 2014 MCT guideline in the spring of 2013."
The timeframes are meant to provide industry with "a lot of lead time and opportunities to comment on the capital initiatives before they are finalized in the fall of 2013," she said.
Overall, the briefings that Dickson currently receives relating to results in the p&c industry "are rather dull compared to others sectors - and that's a good thing," she said. "Dull is good, especially in an environment unlike any we have experienced for many decades."
While p&c companies "are being negatively affected on the investment side due to low interest rates and market performance, and economic uncertainty weighs on the sector, other measures look good," Dickson suggested.
It is a tale of the good and the not so good. The p&c sector experienced the best return on equity this year since 2007, although 34 companies did have negative ROE; and while underwriting income has been the strongest since 2006, a third of the industry continues to experience underwriting losses.
To the good, favourable weather in the first half of 2012 and Ontario auto insurance reforms "look to be having a favourable impact on the industry."
Noting the scope of events in recent years linked to natural catastrophes and global financial turmoil, Dickson added Canada's p&c sector escaped the worst of it.That said, she emphasized industry must guard against complacency.
Complacency may be the foe of preparedness, something that is sorely needed if Cat event losses are to be minimized. Preparedness could prove the difference between life and death, economic resilience and recovery, Don Forgeron, president and CEO of the Insurance Bureau of Canada (IBC), told NICC delegates.
Taking a look at the big picture is key to providing leadership, Forgeron said. "It looks beyond the consuming preoccupations of the present to the emerging significant risks of the future."
Earthquake presents a major risk to this country, he said. "It's an issue that's crying out for leadership - a peril that goes beyond the focus of insurers into the homes of each and every vulnerable Canadian," he told delegates. "Beyond the risk to human life, an earthquake in Canada presents the most significant risk to the insurance industry and possibly to the Canadian economy."
Delegates were asked to imagine if a 7.2 magnitude earthquake hit historic Quebec City. Unprepared, there would be damaged or destroyed homes, collapsed bridges, power outages, severed communications, and food and water shortages. Prepared, losses would be reduced as a result of measures like upgraded building codes, retrofits in older homes, co-ordinated response plans, and post-disaster plans that are integrated among all levels of government.
AUTO REFORM IN DRIVE
Despite Ontario's auto insurance industry not being in as bad a situation as many may think, it needs to adopt a considerably tougher stance to address fraudulent claims, Toronto lawyer John McLeish said during a panel discussion at 2012 NICC.
McLeish, a partner with personal injury firm McLeish Orlando LLP, suggested the 2010 auto reforms mean that Ontario's industry is "almost there in terms of a dream product."
In the first half of 2011, accident loss benefits improved over the previous year, as has the industry financial loss ratio, McLeish reported, citing data from a Financial Services Commission of Ontario report to a government committee earlier this year.
That said, problems persist. For example, an IBC-commissioned report indicates that Ontario has the highest average premiums in the country and high costs for insurers.
George Cooke, CEO of The Dominion and a fellow panelist, said studies suggest that 10% to 15% of costs in Ontario auto product relate to fraud. Much of that fraud is concentrated in the Greater Toronto Area, Cooke noted.
McLeish said that the insurance industry needs to fight harder against exaggerated claims. "In a way the insurance industry is (its) own worst enemy," he suggested.
McLeish reported having spoken to insurers who know from their own investigations that exaggerated claims are being made, but pay out "nuisance claims" to avoid the larger legal costs of a trial. "I think that's a huge mistake."
McLeish cited the Canadian Medical Protective Association, which represents physicians, as an example of how fraud can be fought successfully. "If you start a lawsuit against a doctor, you have to absolutely assume that case is going to go to trial," he told delegates to the NICC, which could be expensive for defence lawyers and plaintiffs.
"They will spend two dollars to save a dollar," if they do not think a claim is right, he commented. "It's worked wonderfully well for them."