Bracing for 2007

Canada’s primary insurers stake their financial livelihood on predicting the future using past weather patterns and catastrophe trends. If true, then what is to be made of the upcoming 2007 season?

In 2005, Canadian insurers paid out a record number of damage losses associated with natural and man-made catastrophes. Global warming patterns could make for even more extreme weather patterns in 2006, pundits warned.

But here 2006 is nearing an end and, except for recent and serious storm damage in B.C., overall most primary insurers would agree that 2006 has been an excellent year as far as the relatively low number of catastrophe losses is concerned.

So looking forward at the 2007 renewal season, primary insurers have an important question on their minds: Which year represented most accurately the broader catastrophe trend for the next three years? 2005? Or 2006?

Since insurers are professionals at hoping for the best and preparing for the worst, many of Canada’s primary insurers are bracing themselves for more of 2005 in 2007. Year 2006 has provided welcome relief, they say, but insurers should not assume sunny days are here to say. Some say we are in the middle of a soft cycle now, and historically that would suggest another hardening market in two or three years.

As we approach the renewal season, Canadian Underwriter asked 12 CEOs (representing Canadian primary insurers) to discuss their Top 1 or 2 issues going forward into 2007. Their responses follow in alphabetical order by last name.

Katherine Bardswick, President and CEO, Co-operators General Insurance Company

The relative calm on the storm front during 2006 must not be mistaken for a trend, a sign of things to come. Storm losses have been rising at an alarming rate for decades; there is no reason to think this trend will reverse itself. More and more people are living in areas we know are prone to natural disasters.

As an industry, we’ve got to fight this battle on many fronts. For example, we must take a more proactive role in influencing government planners to invest in infrastructure and response strategies to prevent catastrophe loss trends from being further exacerbated.

Building codes need to be updated to better protect Canadians. Here, too, we can play an important role: this fall, Canada’s first safer living home was built under the Designed . . . for safer living program, an initiative of the Institute for Catastrophic Loss Reduction. ICLR’s critical efforts provide the type of science-based research that will help us broaden our influence on all stakeholders who can and should be involved.

The second major industry issue on my mind heading into 2007 is the ongoing pressure to keep lowering auto rates. At a certain point, the natural inclination of governments, media and the public to demand lower prices will clash with the realities of inflationary pressures. That point is fast approaching. While the portfolio is still performing adequately, we’re beginning to see increasing claims severity and frequency. Without incremental auto rate increases, the industry will hit the wall once again, resulting in jarring increases. It seems likely such jarring increases would be met with the same outrage we’ve witnessed in the past.

Jean-Francois Blais, President and CEO, AXA Canada Inc. – Group of Companies

Once again we find ourselves at the turn of the year. What lies ahead? The industry is in good financial health, technology is evolving rapidly and expertise is increasingly harder to come by in both distribution and manufacturing. The industry’s overall image is improving. For AXA, two key drivers in 2007 will be service and distribution.

Regarding service, in any business the Number 1 priority is the client. Our primary focus is to satisfy client needs. Understanding and buying our products is complex, and clients need advice they can trust. Every day, brokers are facing more intense competition in the distribution arena. Improving service and technology for our brokers and their clients is therefore key to AXA’s success. However improving service requires investment, big investment, to prepare for tomorrow’s changing world.

A second major issue is distribution. The value of brokerage firms, like that of insurance companies, has grown in recent years. This, combined with the fact that many brokerage firms need a succession plan, will lead to increased consolidation on the distribution side. But consolidation requires heavy investment. At AXA, we are fully prepared to support our brokers in this area.

As Yogi Berra is reputed to have said: “It’s tough making predictions, especially about the future.” Accordingly, at AXA we will concentrate on making significant investments to better support our brokers and their clients and to provide financial tools to brokers seeking to make acquisitions.

George Cooke, President and CEO, Dominion of Canada General Insurance Company

Where are we in the cycle? This is a question on many people’s minds as 2006 comes to a close. No doubt, we are well into a soft market. Consumers are enjoying lower premiums and are being chased for their business. Although painful memories from the last cycle remain, all is well, or so it would appear. The combination of conditions – the ‘perfect storm’ – that caused a sudden and dramatic market hardening starting in late 2001 is unlikely to be repeated. Barring some unexpected dramatic circumstance, the turn this time should be neither sudden nor dramatic.

Companies that made growth their top priority into and though this period of market softening will undoubtedly drive prices still lower. However, their actions alone should not recreate the kind of crunch experienced last time.

Competition is good for consumers in the long run. Insurance consumers are paying less over time than if competition was not present. That’s the good news.

The bad news is that insurers are quite likely, once again, to ignore development in claim costs until it is too late. Many will be taken by surprise – again – by what is painfully obvious. Intelligence would dictate stabilization in mid-2007. However history often repeats itself, so look for market softness possibly through 2008.

Growing by cutting price beyond reason is so much fun, it seems hard for some to admit that the party is over. This kind of denial, even by a small number of companies, is bad for the industry’s health (and not just with respect to profitability). Goodwill with consumers is hard-won in our business and easily lost – again!

Claude Dussault, President and CEO, ING Canada

I believe 2007 will be remembered as the year of the customer. Prosperous insurance companies in the New Year will put a stronger emphasis on and devote key resources to focusing on the needs of customers. Insurers that develop the types of products and services that consumers want and take a more customer-centric approach to doing business will enjoy a key competitive advantage.

Innovation will also play a key role going forward. Companies have proven that innovation within the current regulatory framework is certainly possible. The tremendous response insurers have received regarding various new customer-centric initiatives clearly indicates innovation has been very positively received – and results in better outcomes for customers. Those in the industry who can differentiate themselves through innovative new products and services will be very successful.

Year 2007 will see a continuation of the progress being made on the regulatory front. Current reforms that support innovation have had a positive impact for consumers. Insurers will continue to work closely with regulators to promote reforms that encourage greater innovation and a more customer-centric approach to doing business. Less regulation is better for consumers: it allows insurers to be more innovative and put more emphasis on the customer.

The industry’s current health has bene
fited consumers. Companies will never be in a better position than right now to implement a customer-centric framework. As a result, customers will be more receptive to companies that reach out to them with new ideas.

Insurers will need to become even more attentive to the needs of brokers and help them become more customer-centric. Companies that outperform their competitors will provide better technology, marketing support and training, making it easier for brokers to do business. Successful insurers will tailor their specific initiatives to help brokers improve their businesses and be more effective in serving their customers.

Robert Landry, President and CEO, Zurich Canada

The shortage of qualified insurance professionals is a growing issue for our industry. In the past, we haven’t done a great job of attracting new talent and promoting career progression opportunities for our employees. We know our industry needs good people with first-class skills to deliver the professional, knowledgeable services our business demands. With the support of organizations like the Insurance Institute of Canada (IIC), we can actively promote the achievement of insurance qualifications. All of us benefit – as individuals, organizations and as an industry – by recognizing and rewarding greater professionalism through continued learning and study.

During the last cycle, our industry benefited from a more stable and responsible approach to underwriting and pricing. With the market in transition, however, the challenge for insurers will be to maintain these strong and disciplined approaches going forward. In addition, delivering innovative products and quality service that directly respond to the needs of distributors and customers will also continue to dominate insurer agendas.

Prudent management of catastrophe exposures will continue to be a significant issue for insurers in 2007 – a natural response to the disastrous 2005 hurricane season losses. Although nature has given the industry a respite this year, insurers will continue to face the challenge of balancing and managing their exposures in vulnerable areas, since future catastrophic events are expected to increase in frequency and severity. Achieving consistency in catastrophe modeling and calculating the impact of catastrophic events is an ongoing issue that is vital to managing our reinsurance exposures and capacity requirements.

Year 2007 will undoubtedly be an exciting but challenging year for us all. I firmly believe an integral part of meeting these challenges is to build an industry workforce that is highly educated, professional and fully equipped to contribute successfully to our industry in 2007 and beyond.

Charles Lawrence, Chief Agent, President and COO, CNA Canada

Canada’s property and casualty industry continues to face many challenges, ranging from technology to compliance to reputation.

At the core of these challenges remains the need for underwriting profitability and pricing stability. The question is: How do we stop the cycle of declining rates and increasing combined ratios that result in decreased profitability?

We have all read articles on the insurance cycle. Some accept we cannot break the cycle, while others suggest that increasing rates will mark the end of it. And so the cycle continues…

Perhaps the answer is not about rates but about expertise, which fosters healthy competition. An insurer identified as a “good competitor”:

* has knowledgeable, experienced and well-trained employees;

* maintains underwriting discipline, regardless of market conditions;

* wins on better products and services, knowledge, and expertise;

* understands risk and charges appropriately resulting in consistent profitability;

* stands the test of time – i.e. does not enter and exit markets; and

* does not lower rates to gain market share.

Without expertise, the landscape changes and we drift back towards the approach that the lowest rates win the day.

Inadequate pricing can result in insufficient reserves, carriers exiting markets and possibly bankruptcy (to name a few possible consequences), further restricting the supply of carriers to only a few.

We need to flatten the cycles and maintain stability, giving our customers confidence in the industry. This will enable insurers to achieve sustained profitability. The real answer may lie in promoting expertise through the development of and investment in our people.

Igal Mayer, President and CEO, Aviva Canada

Last year, I reflected on what it would take to make sure independent brokers thrive in a changing market. Twelve months later, the preservation of the independent broker channel is an even more fragile: a new threat has emerged. In 2006, we saw a clear trend toward independent brokers being purchased by insurance companies and converted into captive agencies.

I think the shift in the market toward captive or tied agents is a major loss for consumers and ultimately threatens the long-term viability of independent brokers as the key distribution channel for advice-based sales and service. When brokers cease to offer independent advice and choice, the ramifications include a gradual erosion of the perceived value of all brokers.

Despite these concerns, I recognize the dilemma of an independent broker who wants to exit the business and has an immediate and generous offer from an insurer. Aviva has developed a four-point plan that includes a number of specific financial “bridging” options for brokers. Our plan is intended to give brokers the time they need to explore ownership possibilities that might better suit the independence of the broker channel.

Year 2006 will no doubt go down in history as a very good year for the industry. Healthy competition has resulted in strong availability, choice and price stability. These conditions have been largely driven by low claims frequency, which has essentially offset or subsidized the need for rate increases. This anomaly in weather patterns has arguably fuelled the soft market, particularly in commercial lines.

However a “perfect storm” may be on the horizon. The prolonged extension of good weather is creating a false sense of security in the sustainability of results and current static pricing levels. The longer we bask in the good weather, the more the pressure for rate increases builds. And of course if the rates increase too quickly or too much, consumers become frustrated and lose confidence in our industry.

Kevin McNeil, President and CEO, Gore Mutual Insurance Company

Insurance companies share many common concerns, including consolidation, increasing regulation, and potentially deteriorating underwriting results – especially in the auto product and commercial lines.

Gore Mutual’s top priority in 2007 is one that affects our brokers the most. Threats to our broker partners will always have our utmost attention. Right now, one emerging threat is the damage caused by insurers acquiring brokers and/or building direct operations.

Business built by independent brokers has been leaving the channel. This is eroding the broker model, and will impact the efforts of the industry to increase consumer confidence. Customers choose an independent broker for a reason. Fortunately, options are available that meet brokers’ succession needs, while preserving the independence of their brokerage and the livelihoods of their staff.

Gore Mutual has been watching direct writers closely. We believe brokers are responding to the challenges created by insurers competing directly for their market share. Although few brokers can compete with the substantial marketing efforts of direct writers, few direct writers can compete with the personal service brokers provide to their clients.

It all comes down to choice. We at Gore Mutual have made our choice based on a con
viction that consumers will always be best served by an independent broker..

Ellen Moore, President and CEO, Chubb Insurance Company of Canada

The global insurance market is experiencing one of its best years ever. The absence of catastrophic events in 2006 is helping generate significant underwriting profit for most insurers. Consequently, commercial rates continue to trend downward with few exceptions. Personal auto loss development is favourable and pricing is stable. Homeowners results are beginning to show the signs of several years of housing inflation as loss costs rise in both materials and labour. Overall, through 10 months, the industry in Canada is growing premiums at a low single-digit rate.

What does this mean for 2007? We expect underwriting discipline on pricing and coverage to be further tested, specifically in professional liability and high-risk casualty. Recent entrants from Bermuda and London have added significant capacity and pressure on pricing. These markets are enjoying a place in the insurance cycle where their services and financial strength have yet to be tested. Experienced underwriters have learned from the past to focus on underwriting quality and profit. This is a responsibility for which all underwriters must be vigilant, and is critical to the long-term health of our industry.

We are also concerned by the pace and nature of recent broker consolidation. These changes can be confusing to our customers and consumers at large. This is especially true with insurers with multi-channel distribution and where books of business appear to move among underwriters at a wholesale level. In recent years, the industry has worked hard to gain the confidence of our customers. Much progress has been made regarding broker and company disclosure and transparency. It is imperative that we continue to ensure the highest level of integrity with our customer and broker relationships as this consolidation continues.

Rowan Saunders, President and CEO, Royal & SunAlliance Canada

The Canadian property and casualty industry has strengthened quite dramatically over the past several years. Sweeping product reform across all provinces, a more disciplined approach to underwriting and market consolidation amongst the larger players all had a positive and lasting impact on the profitability, as well as on the overall stability of the industry.

When I reflect back on this past year, it is evident to me that healthy competition is alive and well. Significant investments in mass marketing campaigns and technology enhancements are fuelling a fast-paced environment. While the federal government’s promise to uphold the Bank Act has played a critical role in helping to manage the pace, it is becoming more and more important to understand our customers’ buying habits and deliver the targeted value propositions that people are looking for from their brokers and insurers.

Looking ahead, I anticipate the race to continue with more challenge and change within our industry. Our traditional generalist approach to selling insurance will be replaced by innovative marketing, alternative distribution models and targeted and segmented customer value propositions. Further consolidation will be necessary for both insurers and brokerages to compete and strive for growth.

As a whole, 2006 was another good year in terms of results for our industry. However, we are starting to see a divergence in performance with some companies. Those who have declined to take any actions to fundamentally improve their portfolio and operations will no doubt follow the cycle.

Looking ahead next year, the R&SA plan calls for organic growth and further bolt-on acquisitions. We will also continue to invest significantly in the broker channel. We will do this through: joint marketing campaigns designed to promote the great service that brokers offer to consumers further technology enhancements that will make it easier to place business with us investments in broker-growth initiatives and succession planning.

William Star, President and CEO, Kingsway Financial Services Inc.

The past two years have been exceptional years for the North American insurance industry. Year 2006 will also produce good results, but is showing signs of deterioration. Although underwriting results have slipped, investment income will offset the slight reduction in underwriting profit. The market has remained stable but further deterioration in the underwriting results will occur during 2007. Earned premium income during the year will decrease due to rate reductions in the previous years.

The greatest problem the Canadian insurance industry will face during 2007 is government interference. The residual pool in Alberta has grown to be the largest automobile insurer in the province; it will have a loss ratio higher than any previously reported results in Canada. The “rate grid” is not working, but the government refuses to face reality and motorists will eventually be deprived of a competitive insurance market.

Many provinces have placed unreasonable restrictions on insurers and have reduced profits to unreasonable levels. At the same time, banks and oil companies have been allowed to earn record profits. It is clear which industry leaders have banned together to resist unreasonable government demands.

There is a continual threat that a government-run automobile insurance plan will be introduced in New Brunswick if the insurance industry does not offer reduced rates. If companies do not resist, underwriting profit will disappear over time as we are seeing in Alberta. To create a viable market, the insurance industry must work together to fight government like other industries do.

J.R. (Bob) Tisdale, President and COO, Pembridge Insurance Company

It was another great year for consumers in Canada. Rates continued to fall, voluntarily in most cases, and increased competition produced more new products, services and discounts.

Past experience suggests the industry is halfway through the current soft market. There is reason for optimism in 2007, but it is going to take a strong underwriting discipline commitment from insurers in order to sustain the stability of the past couple of years.

I anticipate the market will begin to firm up in 2008. If, however, the industry ignores the leading indicators and broadens its underwriting appetite even further in the months ahead, then we run the risk of falling back into the same traps that caused turmoil in the marketplace not long ago. The industry must avoid another crash-landing.

Pembridge is better prepared to sustain the inevitable hardening of the marketplace. We have an entrenched underwriting discipline and a commitment to remain on the leading edge of product development and technology.

On another front, the independent broker will continue to play an integral role in the success of the market in 2007. Brokers are gaining back market share and Pembridge will continue to promote an economic environment that helps brokers drive growth and prosperity.

Pembridge stands firmly behind and supports the independent broker. We will not compete with our broker partners and we will act in a manner that safeguards the independence of brokers. Pembridge will continue to advocate for clarity in the distinction between the distribution channels.

Looking to 2007, I believe the industry is well positioned for further growth and prosperity. We have a strong footing to tackle any obstacle that may lie ahead. Consumers, brokers and insurers will all continue to benefit from a healthy, stable and competitive insurance market.