Crowded House

Canada’s relatively attractive economy is contributing to a heated property and casualty insurance market.

Canada emerged from the financial crisis of 2008 and 2009 in relatively good shape, and with its major financial institutions very much intact. Among its strengths, Canada saw its employment rise by 93,000 jobs in June; it recently became the first major industrialized country to raise interest rates; and there are other significant indicators of a reviving economy, including in the automotive and trucking industries.

The country’s relative attractiveness, however, is creating overcrowding and a hyper-competitive environment among property and casualty carriers. Some new entrants, it would seem, are mistaking this relative stability for growth. There are only about 34 million people in Canada — fewer than in California — and annual property and casualty premiums in Canada total about $40 billion. Yet there are now 230 licensed insurers competing for this $40 billion; half of this amount is in personal lines, including automobile insurance.

CANADIAN RISKS

Why are so many insurers fighting for pieces of a relatively small pie? Canada is seen as a relatively catastrophe-free environment, providing insurers with an improved spread of risk and the hope of attractive returns in the absence of major losses. Although Canada’s recent history may be encouraging in this regard, carriers should not mislead themselves as to the real risks involved in covering Canadian industries. The energy industry, for instance, entails a number of risks:

• deepwater rigs operate near the coast of Eastern Canada, where severe storms are common;

• “capped wells” in the Beaufort Sea face Arctic conditions; and

• the Alberta oil sands and other complex risks present significant claim issues in potentially isolated, harsh conditions.

The risk of environmental catastrophes in such conditions is real, and organizations should expect carriers to factor such risk into their pricing.

Other risks are present, if not immediately obvious. In May 2010, for instance, forest fires ravaged vast tracts of Northern Quebec, disrupting the Canadian forest products industry. Such incidents have been commonplace in British Columbia in prior years.

Market Expansion

Despite the above risks, expansion into Canada continues, with many new entrants ignoring personal lines in favor of the more lucrative commercial business marketplace. Axis and Berkley have entered the market within the last year; QBE recently opened non-underwriting offices in Toronto; and Ironshore is finalizing its licensing process. All told, there are more than 230 licensed property and casualty insurers operating in Canada, in addition to government- owned auto insurers in British Columbia, Manitoba and Saskatchewan. Marsh anticipates long-term market participants, as well as relatively new entrants, will experience significant pressure on rates as these players battle for market share.

These new entrants are arriving despite less-than-stellar returns on underwriting property and casualty business in Canada. According to data published by Canadian Underwriter and MSA Research, total property and casualty industry pretax operating earnings were $3.9 billion in 2009. The bulk of these earnings — $3.7 billion — came from investment returns, as underwriting profitability was essentially flat.

Canada’s industrial base still relies heavily on automobile manufacturing, forest products, oil and gas and mining. Although there are signs of economic growth in the Canadian domestic market, conditions are far from robust in Asia and the United States. Marsh anticipates it will be some time before key underwriting indicators such as sales and payrolls return to conditions reflecting substantial growth. Even after two quarters of positive growth, Canadian GDP is still below pre-recession levels, leaving more insurers chasing after pieces of a smaller economic pie.

BARRIERS TO EMPLOYING CAPITAL

Other complex factors at work in Canada will make it difficult for new and old market entrants to successfully employ capital, including:

Acquisitions by foreign companies

Each time a Canadian company is purchased by a non-Canadian entity, the opportunity to deal with a headquarters operation and sell lines such as directors’ and officers’ liability decreases. Some industries have been affected more than others. For example, no primary steel producers remain in Canadian hands today.

Strong currency

With the Canadian dollar tracking closely to the U.S. dollar, Canadian goods and services are no bargain for purchasers paying with Euros or U.S. dollars. Economic growth in Canada that was roughly double the U.S. rate in the first quarter of 2010 is unlikely to reverse this trend.

Tight corporate budgets

Canadian companies, like their counterparts in other countries, have engaged in spending cuts across the board, and show few signs of loosening their purse strings. Indeed, 57% of Canadian financial executives surveyed recently by CFO Research said economic decisions made during the downturn have improved their companies’ long-term prospects for success — hardly a sign of an impending spending surge.

GAINING MARKET SHARE

Of course, pointing out that the Canadian property and casualty market is crowded is a bit like pointing out that all the tables in a restaurant are full. It merely underscores the desirability of the destination. Insurers are usually confident in their ability to provide an acceptable return on their investment, no matter how competitive the environment. If Canada, with its enviable political stability, relatively strong economy and wealth of natural resources, remains an attractive market for insurers, the question then becomes: What can new and existing participants do to gain market share?

Marsh believes successful Canadian insurers will focus on three key elements:

A realistic approach to risk

The real risks related to climate change, ocean acidification and other evolving conditions are poorly understood, but it is clear changes are taking place that will have a significant impact on how commercial lines insurance should be underwritten and priced. Similarly, the long-term environmental impact of major energy projects such as the Alberta Tar Sands needs further assessment. These undertakings are beyond the reach of any individual insurer and call for the establishment of objective public/ private partnerships.

Deep, specialized industry knowledge

Canada’s resource-based industries, including mining and forestry, are deceptively complex. For many organizations, it can be extremely difficult to gauge the real risks involved in such enterprises, and to get a true picture of industry profitability through one or more economic cycles. And yet, such knowledge is essential to establishing appropriate pricing, funding reserves and providing a proper level of service.

Innovative technology use

Personal lines insurers using analytics to identify potentially problematic applications before they become disputed claims will have an important competitive advantage over insurers without access to such technology. Similarly, insurers whose systems automatically route problem claims to the right inhouse experts — saving time and money — will be able to devote more resources to core aspects of the business such as sales, marketing and investments in customer satisfaction.

Canada is ultimately a great place in which to do business. Insurers in this market — both established competitors and relatively new entrants — must base their planning on realistic assumptions and not make the mistakes that too many insurers have made in the past. There will always be room for carriers that add real value, but Canada, with all of its wide-open spaces, simply isn’t big enough for i
nsurers to compete on price alone, especially with an insufficient appreciation for the real risks of doing business here.