Canada in high demand

Had anyone contended at the beginning of last year that Lloyd’s premium signed business in Canada would increase by 25% in 2004, I would have thought that a rather outlandish projection. Lloyd’s of London’s global capacity was essentially flat in 2004, an appropriate response to the onset of an almost universally softening market. And, not to put too fine a point on it, given the additional and not insignificant regulatory and funding burdens a carrier such as Lloyd’s faces in Canada, business has to perform better than in other parts of the world in order to compensate for the capital and solvency costs.

Despite the less than positive portents, healthy growth took place. Lloyd’s Canadian income rose to Cdn$1.2 billion for 2004 – breaking the billion dollar barrier for the first time. Today, more than 80% of Lloyd’s syndicates trade in Canada, focused almost entirely on commercial lines business which represents 90% of their activity. At well over 3%, Lloyd’s marketshare of total non-life premiums in Canada is higher than in most other international markets.

SPECIALIZED RISKS

But, what are the reasons behind this recent growth and the apparent strengthening of this “Transatlantic relationship”? Firstly, Lloyd’s has benefited from a significant uplift in the Canadian market generally. Premiums here have undergone year-on-year compound growth of 12.1% since 1998, significantly stronger than other major markets such as the U.S. (8.1%) and the U.K. (9.8%).

The Canadian liability line, in particular, has grown at an exceptional rate with the country’s net written premiums more than doubling from Cdn$1.8 billion in 1999 to Cdn$4 billion for 2003. At Lloyd’s, liability is an important part of the underwriting equation, representing 39% of premium income from Canada. However, it is a complex market, and the country is not immune to the pressures of growing litigation. That said, the local exposure to rising litigation costs is not as high as in the U.S. where compensation culture is rife. This makes it an attractive market for our underwriters who write for profit and thrive on innovation.

Growth in Lloyd’s Canadian premiums has clearly been fuelled by a rising demand for capacity among Canadian businesses. Canadians, like the rest of the world, look to Lloyd’s as the leading marketplace for specialist business. After all, a lot of this business, such as aviation and energy, was pioneered by Lloyd’s.

GOOD BUSINESS

Of course, any discourse on this subject must not ignore some important structural factors which make Canada an attractive place for Lloyd’s underwriters to do business. One is quite simply cultural: the ties between our two nations are considerable, and we find it easy to do business together. Canadians tend to understand Lloyd’s better than other markets, partly due to the large number of British people who work in the industry here.

Canada is also has one of the most intermediated markets in the world, and Lloyd’s works with a nationwide network of more than 350 approved brokers. About 85% of the market’s non life business is arranged through a broker in Canada, which obviously resonates strongly for Lloyd’s, one of the last exclusively ‘broker’ markets in the world.

As for the financial health of the Canadian p&c insurance marketplace – it is currently good, and it is on a par with the rest of the world. The last three years of hard market pricing conditions have helped insurers repair balance-sheets, and the underwriting years between 2003-2005 are each expected to return impressive levels of profitability. The p&c insurance industry’s overall return on equity (ROE) for 2004 is expected to be around 20.6%.

Lloyd’s certainly recorded strong profits globally in 2004 – and this in the worst-ever year for industry losses from natural catastrophes. We recently announced an annually accounted profit of US$2.6 billion despite net claims of US$2.3 billion from the U.S. hurricanes. This represents a strong performance, and one that was echoed in Canada.

FUTURE SIGNS

Chris Sharpe, a treaty underwriter at Hiscox, agrees that Canada is an attractive market. “One of the key things about the Canadian market is the excellent quality of information we receive from our clients. There is generally good detail and transparency in the data,” he observes. “The original insurance rates are adequate in relation to the perils covered – in contrast to other territories. Overall, there’s a strong sense of partnership and they are good people to work with.”

But, unfortunately not everything that currently characterizes the Canadian p&c insurance environment is good. The costs of regulation, which I mentioned earlier, continue to negatively impact carriers such as Lloyd’s. Further, the current, politically-charged atmosphere – where making a profit is somehow perceived as a sign of industry malevolence in Canada – is perplexing for Lloyd’s underwriters, especially in comparison to other jurisdictions, where it seems to be better understood that if policyholders want an industry able to withstand catastrophes and pay out on claims, financial strength is critical.

And, despite all the good news, there is simply no room for complacency on financials. There were excellent market conditions in 2004, but general opinion among local analysts is that rates in Canada began to soften mid-year, with commercial property premiums coming under pressure and liability pricing having reached a plateau. It is a time that reminds us how important it is to maintain our strong focus on disciplined underwriting for profit, and Lloyd’s remains resolutely committed to managing performance to this end.

So far, this seems to be working well. Matthew Wilken, reinsurance underwriter at Kiln, says “Rates have been under a bit of pressure in the Canadian market, but overall discipline has remained strong, and the relationships that Lloyd’s and its syndicates have with Canadian buyers are exceptionally good”. Lloyd’s commitment to the Canadian market continues to flourish in 2005. On a more practical level, we will be actively involved in a number of events in the country this year (including sponsorship of the Canadian RIMS conference). Lloyd’s chairman, Lord Levene, will also visit Canada toward the end of this year – following on a successful tour of Toronto and Montreal in 2004.

Lloyd’s relationship with the Canadian market remains a good – full of opportunity as we head into the second half of the year. Market conditions may be getting tougher, but with continued discipline on the part of underwriters, and sustained demand for expertise in specialist classes of business, the future can be as bright and prosperous as the past.