The Big Squeeze

“Fragmented” is a term commonly cited to describe the Canadian p&c insurance industry – typically in the context of the onward march of merger and acquisition (M&A) activity among carriers. Compared to other segments of the financial services industry, such as banks and life insurers, the p&c industry is still loosely concentrated. The top five carriers represent just 43% of the market, versus the bank and life company markets, which are closer to 65-75%.

Several insurers have publicly stated that the door is open for increased acquisition activity in Canada. There were 29 announced deals in 2011, compared to 21 in 2010 and 12 in 2009, according to PwC’s national insurance consulting practice.

“Most of the activity in the sector is coming from strategic insurance companies that are turning to M&A as a way to scale up and gain efficiencies, specialty services, and/or lock up distribution channels,” says Allan Buitendag, leader of PwC’s national insurance consulting practice, in a report published this year.

Already this year, Intact Financial made a strategic acquisition of JEVCO Insurance Corporation for $530 million to cement its position as the largest p&c insurer in Canada. The purchase, announced in May, took place roughly a year after Intact Financial bought AXA Canada for $2.6 billion in a deal that has now closed – and caused serious ripples in the adjusting profession.

In June, RSA Canada announced its intention to acquire L’Union Canadienne from parent company Co-operators General Insurance Company for $150 million. Coupled with last year’s $420 million buy-out of GCAN, RSA Canada is now the country’s third largest insurer.

Landscape changing quickly

“We believe the public insurers are in a unique situation to acquire struggling operations and consolidate the Canadian p&c market,” notes GMP Securities analyst Stephen Boland in a report released last October. “Our analysis reveals the Canadian industry remains very fragmented.”

Boland also targets demutualization as a trend that may spur further consolidation in the industry. “We anticipate that the larger, mutual insurers will continue to work with the Department of Finance to demutualize in order to compete more effectively with the large stock P&C companies,” Boland states. “We believe that other mutual insurers could demutualize which in turn may lead to a period of consolidation, similar to what occurred in the life insurance industry over a decade ago.”

“The landscape is changing quickly and those companies caught in the middle-too large to be niche players but too small to reap economies of scale-will have to rethink their strategies,” adds Buitendag.

Independent adjusters have had a front row seat to this consolidation in their daily business lives. If you replace the word “companies” with “adjusters” in the previous quote, the same scenario applies. In many cases, regional firms with limited markets have seen their contracts with insurers sliced in half, along with a substantial reduction in claims volumes. The unpredictability of the situation can lead to some frayed nerves for adjusters contemplating their business plans.

“If you look at larger insurance carriers, they have acquired all these regional companies to become essentially one client for adjusters,” says Patti Kernagahan, president of national adjusting firm Kernaghan Adjusters. “That does become a little unnerving.”

“When insurers get larger, they carry a bigger stick and it can hurt you more when they hit you with it,” adds Fred Plant, president of Plant Hope Adjusters.

“I think it’s the unknown of ‘what’s next’ that makes people nervous,” notes John Seyler, president of ProFormance Specialty Claims. “The whole backdrop of your business can change in a hurry.”

This change affects various sizes and types of adjusting firms across the country in different ways. There are those who benefit and those who struggle, with some picking up substantial business and others forced to scramble for alternative strategies. One of the key consequences of consolidation for adjusters is that larger insurers tend to retain more claims in-house for their own staff adjusters.

Internalized claims handling

“If an insurer has a critical mass of claims in a certain region, it may staff up to internalize all the claims handling,” Plant says. “If you are a regional adjusting firm, that could represent a huge chunk of lost business. You could be the best adjuster in town but if you aren’t on ‘the list,’ you won’t get the call.”

“I think the base of business has really shrunk for many small and regional adjusting firms,” notes Greg Merrithew, president of Arctic West Adjusters. “For example, if I look at our receivables list, 60-70% of our accounts are new – our volume hasn’t really dropped, but our client base has changed. The eggs in the basket are smaller.”

“While there are signs of the insurers keeping more files in-house as of late, we have not been exposed to dramatic change,” says Michael Holden, president and CEO, Granite Claims Solutions. “Industry consolidation is occurring along side a number of other current events, in particular the mild winter, spring and changing Ontario auto legislation, which makes it a little more sensitive to gauge impact.”

Moving files in-house is part of a broader strategy for insurance company consolidators to gain greater economies of scale by focusing on efficiency, size and standardization. Another key aspect of this trend is the move to national contracts with one or two adjusting firms.

For larger adjusters, this has proved a distinct advantage.

“The impact on Crawford of significant consolidation is generally positive,” says John Sharoun, president and CEO, Crawford & Company (Canada) Inc. “The increased sophistication of the procurement process that tends to result when an insurer attains larger market share and influence favors larger adjusting firms with national reach.”

Sharoun explains that the process of insurer M&A activity can “trigger uncertainty” in the short-term at a company, leading to delays in decision-making and strategic planning around claims management.

“Once the company is through the integration process, the impact is generally positive as there is usually a reinvigorated claims team in place that is well aware of and aligned with the organization’s strategy – this clarity helps firms like Crawford develop and deliver services and solutions that are tailored to support that strategy,” he notes. “The strong alignment between the enterprise, its claims department and partners like Crawford delivers powerful results.”

Trigger uncertainty

Granite’s Holden echoes the positive impact of insurer consolidation on larger adjusting firms. “We spend a lot of time developing our Quality Initiative Program around the specific needs of our clients,” he says. “Mergers and acquisitions provide a great opportunity to re-establish these needs with our clients and better understand their strategies and requirements, as they adjust to their extended environments.”

Some adjusters, however, question the ability of national contracts to truly service the diverse needs of insurance carriers. Patti Kernaghan says she has seen trends come and go in more than 20 years of experience in the industry.

“I think over the past couple of years we have seen see a reconsideration of these national contracts,” notes Kernaghan. “Insurance companies are looking carefully at service levels and expertise. For example, I look at what we offer in terms of transportation, which is a specialized field. I would challenge any other firm in the country to match our level of expertise here.”

For smaller adjusters, the trend of national adjusting contracts can leave them feeling out of the loop. “Most small owner-operators may have 5-10 markets, and they have to carefully build and strengthen the relationship with those markets, ” notes Merrit
hew. “The fact is that these contracts are still out of the control of the adjuster. You could be doing a great job, but the decision is made elsewhere.”

In addition to national contracts, larger insurers have been increasingly using procurement managers to oversee all supplier contracts, including adjusters. This represents a more formalized process involving RFPs, detailed adjusting firm information and performance measurement criteria.

“The increased sophistication of the procurement process. . . when an insurer attains larger market share and influence tends to favor larger adjusting firms with national reach as the insurer seeks to capitalize on its market size,” notes Sharoun. “These companies require more complex and sophisticated service contracts from any company wanting to do business with them.”

Procurement process

Kernaghan says she has noticed a few new wrinkles in procurement and RFPs. “What has happened lately is that insurance companies have become more creative in what they are looking for,” she observes, adding that data is increasingly required on online web forms. “They have developed more criteria required in an RFP.”

This formalized process is an emerging reality for many adjusters accustomed to building personal relationships with regional claims managers.

“Procurement managers generally don’t want to see or meet with independent adjusting firms, which they tend to see similar to other suppliers,” says Merrithew. “They require a response to an RFP and then make decisions based on certain criteria. It used to be that you dealt with regional claims managers and they negotiated and discussed relationships with adjusters. That is not the case anymore.”

A key offshoot of the procurement model is a stricter emphasis on pricing, according to Plant. “Larger insurers can use their size to leverage pricing. Over time, they can drive the cost down for adjuster services. That doesn’t mean the work we do is less or different; it’s just that we get paid less for our services,” he notes.

“The pricing issue applies to contractors, third party vendors and everyone in the supply chain, not just the independent adjuster,” Plant adds. “The bigger they are, the more they can squeeze.”

Faced with the daunting set of challenges that comes with insurer consolidation, adjusters are quick to discuss adaptive strategies.

Adaptive strategies

“We need to recognize that our business has changed fundamentally and will never go back to the way it used to be,” Sharoun comments. “The consolidation of insurance carriers reflects the larger trends we are seeing in the global business community. Successful firms in any industry need to have a laser sharp strategic focus with the scale and flexibility to execute it properly. The insurers are pursuing these three objectives aggressively. As independent adjusters we need to find unique and creative ways to support them and help them achieve their objectives.”

This altered competitive landscape will contain some key features, according to Sharoun:

• Business rules are changing and more sophisticated customers will become the norm;

• Insurers will require a fundamental shift away from adjuster’s traditional file-by-file solutions;

• Larger insurers will need a more diverse product offering from adjusters; and

• Flexible pricing and service agreements will become entrenched.

Innovation is commonly cited as a crucial strategy for adjusters to succeed in this changing marketplace. But what specifically does that mean?

“To me, innovation means having experienced, competent, well-trained loss adjusters who can handle a claim from beginning to end,” says Plant. “It does not mean technology, nor does it mean being an AB specialist in Ontario auto. We need to have real loss adjusters who can investigate, quantify and negotiate settlements and provide claimants with the exact amount they are entitled to. It doesn’t mean checking on a loss or handing everything over to the contractor to close the file. If we go down that route, we are just claims administrators – that is not sustainable.”

Plant notes that he has been “preaching this message” to insurance companies that the adjuster is a crucial extension of the carrier’s claims service commitment to the policyholder.

“Some companies get it, but I would say they are the exception,” he points out. “As an adjusting firm, we are committed to bringing people on board and providing them with the right kind of training and continuing education. That is expensive, but I don’t charge more for that. How can independents retain the quality of service if they can’t charge properly for what that costs?”

Other adjusters say that proven strategies are still relevant in today’s p&c insurance industry.

“This may sound mundane but the best way for adjusters to adapt to this new reality is to focus on service with their clients,” notes Kernaghan. “There has to be a high level of communication between the adjuster and insurance company client. We need to be problem solvers for the client and we need to collaborate with examiners to get the claim handled properly and the file closed. That is the expectation today of the adjuster.”

Balance of quality and service

Kernaghan adds that the ability to see the claim from the insurer side of the equation is an invaluable skill for adjusters. “We need to understand that the company claims examiner is being monitored and evaluated on the level of claims efficiency,” she says. “If we are not communicating or collaborating with the client, it slows the process, it lowers efficiency. As adjusters, we need to get to the point, communicate effectively and focus on service.”

Merrithew echoes the importance of adjusters seeking to achieve the right balance of quality and service within their chosen client segments.

“I think the best way to compete is with quality and service,” he says. “The quality is that you have properly trained and educated adjusters who can investigate, do a thorough coverage assessment and manage the claim from beginning to end. I think the focus on quality and service will make the adjuster stand apart. That is the difference between a claims adjuster versus a claims administrator. “

Merrithew notes that firms of varying sizes have to seek their own balance in terms of resources, quality and service. “As national companies get a price edge, they face more of a challenge getting revenues,” he adds. “They have to pay salary and benefits, obviously the size/overhead of their operation is bigger. The question again comes back to how they can maintain quality and service?”

For smaller firms, the decisions and tactics may be different. Merrithew says he has observed a pattern of adjusters finding business niches or specialized service offerings in geographic regions.

“One route for smaller firms to go is to become specialized, whether that is in something like bonds or liability,” he notes. “This attracts the more complex, larger types of assignments. I think there is a trend of smaller adjusters becoming boutique businesses across Canada.”

Another tactic is to seize on opportunities for business that have opened up elsewhere in the marketplace, such as providing claims services to clients with higher self-insured retentions (SIR).

“A trucking company, for example, may go to a broker, set an SIR of $500,000 and it will handle any claims below that,” Merrithew explains. “But they are often too small to have a claims staff or risk manager; they look outside for claims services. We have four SIR accounts and have been able to offset losses from traditional clients. I think this is an opportunity for independent adjusters to acquire business that historically has not been there.”

Meeting the challenge

Kernaghan concurs that when one door closes, another one often opens. “Some merger activity, such as those at the MGA-broker level, may lead to more oppor
tunities for adjusters,” say Kernaghan, who adds that her firm has grown by 54% in the last two years. “There are also private companies doing their own claims through higher SIRs or captives, but I wouldn’t say this is a huge trend. There are, however, definitely some options for adjusters to pick up lost business.”

For Merrithew, the adaptability of the independent adjuster will be tested in a time of insurance company consolidation. He is confident that adjusters of all sizes will meet the challenge.

“My perspective is that when there is change, an opportunity opens up,” he says. “Insurance adjusters have to pay attention to the national picture and see where these opportunities exist. This could be in specialized business areas, servicing SIR clients, geographic niches.”

Sharoun reinforces this emphasis on adjusters paying attention to the bigger picture and tapping into resources currently available to them. “As the national trade association for adjusters, CIAA gives adjusting firms access to training, legislative and compliance advice and a national support network of peers to assist in the transition of our business model,” he notes.

That business model definitely will be in transition mode in the years ahead for adjusting firms of all sizes across Canada. And the emphasis will be on service and accountability.

“Adjusters should constantly challenge themselves to demonstrate their contribution to achieving the insurance carrier’s objectives,” Sharoun concludes. “If you can’t measure your tangible contributions to the bottom line, there is no way your customer can either – and that makes you vulnerable.”