Does Size Matter?

DOES SIZE MATTER?

The answer, of course, varies according to the size of the insurance company.

The question came up during a CEO panel at the 88th Annual General Meeting of the Insurance Brokers Association of Ontario (IBAO).

Brokers asked six company CEO panelists to suggest a reliable financial strength indicator.

Such an indicator would allow brokers to determine whether a Canadian property and casualty insurance company’s solvency is strong enough to survive the worst financial crisis to hit the North American markets since the Great Depression era.

Smaller insurance companies represented at the IBAO’s annual CEO panel — measured by direct premiums written — made the case that size doesn’t matter when determining solvency.

Just because an insurance company is large doesn’t mean it isn’t vulnerable to financial stress, noted Kevin McNeil, the president and CEO of the Gore Mutual Insurance Company. He noted AIG, “the largest insurer in the world,” seemed an improbable candidate for bankruptcy, and yet it survived insolvency only thanks to a recent US$85-billion loan from the U. S. Federal Reserve.

“The question is going to be:Are there going to be any [more] casualties?'” McNeil noted. “And if you go to the newspapers or watch TV, you’ll hear a CEO of a major company stand up there and say, ‘My company’s fine, no problem, we’ll survive this, we’ll be okay.’And then you hear two or three days or a week later that that company went bankrupt.”

So if public statements can’t be taken at face value, how does a broker know which of its insurance markets are strong and which are not?

McNeil told brokers attending the CEO panel that the best strategy for determining financial strength in these unpredictable times is to monitor the Minimum Capital Test (MCT) scores of Canadian property and casualty insurers on a regular basis.

Quarterly MCT scores are publicly available on the Web site of Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions.

Described in basic terms, MCT scores are a measure of an insurers’ available capital divided by its minimum capital requirement. The answer is expressed as a percentage. OSFI requires a property and casualty insurer to maintain a minimum MCT score of 150%.

Gore Mutual’s MCT score in 2008 Q2 (the latest available figures) was 278%, whereas the other companies represented on the panel had 2008 Q2 MCT scores of 207.55% (The Dominion), 184.83% (ING Insurance Company of Canada) and 181.71% (AXA Insurance Canada).

Not surprisingly, though, the largest companies represented on the panel — in terms of direct premium written — jumped in at McNeil’s remarks and reiterated that size does matter.

“I wanted to address the comment that Kevin made about having an MCT ratio that is significantly higher than any other company, which, if you look at it in analytical terms, in Ontario it’s probably a Cdn$300-million requirement,” said ING Insurance president Derek Iles. “And, if I may be so bold to say, that would be a rounding error at ING.”

CONTROL IN FACT: “GENTLEMAN’S AGREEMENT”

The IBAO has asked the province’s insurance companies to sign a memorandum of understanding, promising, in effect, that the insurers will not purchase a majority control in brokerages.

IBAO leadership suggested in Spring 2008 that it would approach the province’s insurance regulator and ask it to re-establish and enforce a “control-in-fact” test that existed in legislation in early 2000.Very basically, the test established that insurance companies could not own more than a 50% controlling interest in a brokerage.

The association has since changed tack and asked the province’s insurers to sign a sort of “gentleman’s agreement” not to control brokerages.

It is not publicly known which insurers have opted to sign the IBAO’s Memorandum of Understanding and which have not. Randy Carroll, IBAO’s CEO, disclosed that four out of 52 Ontario insurance companies did not sign the memorandum at a recent York Fire and Casualty Insurance Executive Forum recently.

“You will recall that our initial strategy is to get agreement among insurers, via a Memorandum of Understanding, that all insurers dealing with brokers agree ‘not to purchase brokerages, nor be in a position to control the management and operational decisions within a brokerage,'” IBAO president Rod Hancock told delegates attending the IBAO’s annual convention in Toronto.

“In addition, the Memorandum of Understanding also provides an option for insurers currently controlling brokerages.

“These insurers can sign the agreement and by doing so agree ‘to cease this practice and to provide a plan that will remedy this situation so they would comply with/pass the control in fact test.'”

The control-in-fact test looks at several factors including, among others, who controls brokerage decisions, equity, financing and volume commitment.

OLD WINE, NEW BOTTLES

The insurance industry is taking its old marketing techniques and just dumping it into a new channel — the Internet — and the approach will not work, Mitch Joel, president of Twist Image, told delegates at the IBAO convention.

“Each month in Canada, there are 5.2 million searches on Google for ‘insurance’ and you’re not there,” he told brokers at the conference. “So, how do you evolve?”

It’s a common misconception that the consumer is now in control, Joel told the crowd. “But one thing has changed,” he said. “Before, when a consumer would talk or complain, it went into a file folder somewhere. Now when they talk about your brand, everybody can hear them. They have this Marshall stack amplifier called the Internet.”

In order to harness this evolution in technology, Joel suggested six points: 1) Think in terms of tribes, not demographics. People are part of a community that includes their work, their families, their cars, etc. Learn to target the tribes. 2) Everything is “with” and not “instead of.” Brokers need to be doing traditional and new forms of marketing effectively.

3) Don’t be fleeting. Every time you connect with a consumer, it’s an opportunity to build a relationship with them.

4) Earn the trust of the consumer to get them out of ‘lurker’ mode (someone who is on your site, but not buying).

5) It’s attitudinal, not generational. The cultural shifts required to increase sales have nothing to do with age, but everything to do with one’s attitude.

6) Do something. By using tools like YouTube, Facebook, Twitter or blogs, you will fundamentally understand why people are using them.

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“If you go to the newspapers or watch TV, you’ll hear a CEO of a major company stand up there and say, ‘My company’s fine, no problem, we’ll survive this, we’ll be okay.’ And then you hear two or three days or a week later that that company went bankrupt.”