Growth in the grey zone

For insurers waiting out a sluggish economy, the Conference Board of Canada’s February snapshot offered signs of life: real GDP and job numbers were up and even a trade surplus seemed likely. In the same month, favourable trade meetings between Canadian, U.S. and E.U. leaders offered a lift for industry players seeking momentum.

Still, many factors – interest rates, global shifts and new demographic realities – continue to push back. That may put insurers in an economic neutral zone, but they still have opportunities amidst pressing realities – if they pivot in the right direction, according to Mary Trussell, sector lead for KPMG’s insurance practice. “They have to be really agile.”

Holding patterns: Interest rates

Those eyeing growth may wait some time for a sustained kickstart. While Conference Board of Canada chief economist Craig Alexander predicts “faster” growth for 2017, it will stay below two per cent, he said in a recent forecast, citing oil prices, a volatile dollar and trade uncertainties.

That poses a significant challenge for insurers, notes Joel Baker, president and CEO of MSA Research Inc. “The Canadian economy is not firing strongly,” he says. “It’s not weak, but it’s not strong,” a middle ground that drags on both sides of the traditional P&C business. Property lines is a growth area, but “the growth is not there on the economic side, he points out. “Consumers are under pressure … and there’s a lot of competition on the commercial side, where a lot of companies are fighting over a small pie.”

Compounding the situation: an extended low interest rate scenario. Net investment income fell from $3.2 billion in 2014 to $2.2 billion in 2015, according to A.M. Best statistics. And with the Bank of Canada holding fast on rates, “the pressure continues on insurers to make money on the other side,” says Baker.

That’s put a “massive focus on costs,” says Trussell. “It’s one of the reasons we’re seeing so much M&A at the moment, because people feel the need to build scale.”

Whichever direction rates take in the coming months – or year – will bring further tests for insurers, according to a year-end A.M. Best report. The status quo means more reliance on new investment strategies, shifting insurer models and alternative investments like commercial real estate. But what would a rapid increase mean? “Unrealized gains accumulated during the years of a low-rate environment would suddenly become unrealized losses, analysts Mahesh Mistry and Catherine Thomas state in Challenges and Opportunities. “Companies adjusting their business models in response to the extended period of low interest rates could be disproportionately disadvantaged if rates suddenly move upwards.”

The good news? Higher rates offer an opportunity for industry players to build competitive advantage with new products, controlled growth and data, notes the report. What’s more, early signs from the U.S. show “a modest rise” in the rate outlook, notes Trussell. But Baker remains cautious. “There’s no reason for interest rates to spike,” he says. “But when they do change, they’re going to change quickly.”

Insurers [are] in an economic neutral zone, but they still have opportunities amidst pressing realities – if they pivot in the right direction.”

A new world order: Protectionism

Interest rates aren’t the only unknown. Coming out of a year that saw Brexit and an dramatic U.S. election result, “we don’t know what kind of CNN news alert we’re going to get every day,” says Craig Worden, executive vice-president at Pollara Strategic Insights.

But business leaders recognize the zeitgeist: 59 percent of Canadian CEOs acknowledge concern over growing protectionism worldwide, according to findings from PwC’s Annual CEO survey. And, a 2016 Insurance Europe briefing zeroes in on the potential impact on the industry, stating that, “the ability of foreign (re)insurers to protect and contribute to economic growth is closely tied to their ability to be authorised by regulators to do business, and to be treated the same as local competitors.”

The briefing, It’s Time to (Re)Evaluate Protectionism notes a rise in global business barriers, including tax demands and fines for foreign firms, between 2010 and 2015, from 464 “trade-restrictive” measures to 2,127. The trend is a risk in itself, it points out since “optimum insurance coverage of major loss events is only possible through a wide geographic diversification of the risks, such moves could lead to a concentration of risk within the respective insurance markets.”

Closer to home, early trade talks between Canada and U.S. seemed to ease immediate protectionist worries here. Baker notes that while “we can’t predict anything that’s happening in the U.S.,” upcoming policies may be less of a wild card. “I think it’s business as usual for the U.S. insurers doing business in Canada and Canadians doing business [there],” he says. “The openness to less regulation is a theme out of the U.S., which insurers would not object to.”

For the most part, insurers here have also exhaled over Brexit. “I don’t’ see direct impact,” Baker says, though, a recent Swiss Re global outlook highlights the possible financial fallout of further EU destabilisation. If Greece or Italy were to falter, Baker agrees, “the global economic uncertainty does affect Canada.”

Demographics: “Grey” can be good

Further benefit can stem from broader changes at home. Senior Canadians – those over 65–surpassed the number of Canadians under 15 for the first time in 2015, with older group set to account for 20 percent of the population by 2023, according to Statistics Canada. “Demographic trends are really important,” says Trussell.

A 2015 Conning study highlights the crunch between aging consumers, shifting risk profiles and the falling demand for auto or home insurance as younger insurance consumers put off traditionally large purchases.

Insurers are already responding to the sharing economy spawned by digital minded millennials with new products, carving out a new corner of the market that’s poised to expand. Back to the Future, a 2015 Privy Council Office/ DMCPI report estimates that 29 percent of Canadians are taking part in the sharing economy; an even higher “sharer” rate than the 25 percent found in the U.S.

That activity “brings both challenges and opportunities to the world of insurance,” says David McGown, the Insurance Bureau of Canada’s (IBC) senior vice-president, strategic initiatives. Before Uber and AirBnB, the industry’s core personal and commercial spaces acted as clear “bookends,” he says. “The sharing economy is starting to blur those bookends.” As a result, insurers are trying to keep up, measuring and pricing risks for services “that are not truly personal and not truly commercial.”

Insurers are already responding to the sharing economy spawned by digital-minded millennials with new products, carving out a new corner of the market that’s poised to expand.”

Though that grey area is ripe for new business, the industry still lacks long-term track records or “a deep understanding of how deep the risk lies and how to price [them],” he says.

Finding opportunity

Where else can insurers find growth? Traditional strongholds face their own pressures. Take auto, where insurers continue to find equilibrium in the market structure, according to McGown. The core of that challenge: finding a balance between regulated rates and costs. “That has an effect on how profitable underwriting the auto insurance business can be.”

Still, with autonomous cars on the horizon, “the longer view is that auto insurance will diminish as a line of business,” Baker points out. And other lines won’t easily fill that gap. “The only growth is in the flood area, which is risky, and cyber, which is risky,” he notes. “There are no easy answers.”

Cyber offers some scope, says Trussell, who points to room for additional products in the market – such as those aimed at data protection – as threats evolve. Canadian insurers can tap into that growth “by ensuring that they have the knowledge and the ability to price emerging risks,” she says. “It’s by no means a mature market yet.”

Amidst uncertainties, insurers are betting on a specific path to both savings and growth: technology investments.

A 2015 KPMG global insurance survey found that 60 percent of insurers and intermediaries see their biggest opportunities in improving operational process and technology.

“They’re a critical part of the decisions that firms will be making not just over the course of this year, but over the next few years.” McGown says, noting that ongoing investments are playing out in Canada through partnerships with innovators or reinvestments in operations. “[Those] Investments can reduce the cost of customer acquisition, or the cost of operations in primary insurance, or lower the cost of claims in some form.”

However, the industry’s current efforts are still “baby steps,” says Trussell. “The real challenge is to leverage those benefits into their core business.”

And soon. KPMG’s Insurance CEO Outlook survey respondents say the next three years will be more important than the past fifty. Perhaps they’ve already taken the most critical step, she says. “Business has a more positive outlook and that has to be good for the insurance industry.”

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Copyright © 2017 Transcontinental Media G.P. This article first appeared in the March 2017 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.