Canadian Underwriter

Fear Factor

November 1, 2004   by Sean van Zyl, Editor

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One of the gnawing concerns of insurer CEOs regarding the decline this year in auto insurance claim costs is that they are not sure what is actually causing this reduction. While auto product reform initiatives implemented by many of the provinces over the past year – pertaining primarily to caps on accident benefits (AB) and bodily injury (BI) awards – have contributed to the decline in claims costs, the insurer CEOs that partook in a panel discussion at this year’s Insurance Brokers Association of Ontario (IBAO) convention believe that the “fear factor” is a significant contributor to the current cost relief.

This “fear factor” benefit, the CEOs explain, occurs when the insured public becomes fearful of the economic consequences of submitting claims and therefore opts to pay for any damage/repair from their own pockets. Besides the “ethical wrongness” of promoting such fear among insureds, the greatest danger this presents to insurance companies is the misconception that product reforms are proving more effective than is truly the case, the CEOs observe. And, they note, the reduction in claims costs as a result of public fear is a short-term relief, which once the political attention surrounding auto insurance dies down, losses on underwriting can escalate dramatically.

Commentary made by the panel of insurer CEOs, as well as feedback from the primarily broker audience attending the convention, suggest that “consumer fear” is not the only “scare” preoccupying the industry’s mind. Like a contagion, fear appears to be lying just under the surface of the industry’s presently calm state, driven by uncertainty regarding the future stability of the marketplace as the pricing cycle appears to have peaked with many lines of business currently witnessing mild price softening.

While insurers as a group vehemently oppose the return of another “soft market”, the actions and words of companies individually suggest that they may well be preparing for the next pricing battle to gain marketshare, brokers say. With company to broker relations already fragile as a result of the tough attitude adopted by insurers in the latest hard market, brokers fear that another round of volatile market conditions could seriously undermine the future of the independent broker distribution channel.


Roughly two years ago, insurers were facing their own survival in terms of poor profitability and capital deterioration, says Igal Mayer, CEO of Aviva Canada Inc. Today, the regulatory landscape surrounding auto insurance has improved vastly, he observes, with the critical Ontario marketplace “far healthier”. As a result, auto premium rates have on average fallen by about 12% since November of last year, which has been accompanied by the beginnings of market stability, Mayer notes. Greater market stability is witnessed by the fact that consumer complaints concerning coverage availability have dropped by 45% from a year ago, while complaints concerning pricing are down by 80%, and the industry’s high-risk auto pool, the Facility Association (FA), has seen its population decline by about 50%, he adds.

“Outside of Ontario, [New Brunswick’s premier] Bernard Law’s commitment to private sector insurance is a huge win for us [the private sector insurance industry],” Mayer points out. And, he observes, an investigation undertaken by the federal Competition Board in August of this year regarding consumer complaints came up with a positive decision in favor of the insurance industry. “This is vindication that our industry is working,” he adds.

George Cooke, CEO of The Dominion of Canada General Insurance Co., concurs that Ontario auto is now a much healthier marketplace compared with conditions of a year ago. The auto reforms introduced by Ontario’s provincial government are seeing a reduction in claims costs, specifically regarding healthcare service rates which have been reduced by 30%. “This has taken the ‘fat’ out, which has reduced the fraud cost. The net effect [of the auto reform changes] is positive, but we have to be cautious.”

“There is a difference in the mood of the industry [today], it’s more positive,” comments Rowan Saunders, CEO of Royal and SunAlliance Insurance Co. of Canada. “We now have returned capacity and competition [between insurers].” Saunders confirms that loss costs are dropping, but a hefty price of the hard market remains in strained consumer relations. “This is not a ‘good change’ that the industry has gone through,” he adds.

“We now have financial stability. The market is moving as we expected it to, and this will encourage more capital and competition into the [Canadian] marketplace,” predicts Derek Iles, vice president of ING Insurance Co. of Canada. ING recently acquired most of the operations of Allianz Canada. In this respect, Iles believes that the improving underwriting environment, coupled with capital inflows, will prompt a new round of industry mergers and acquisitions (M&As). “Industry consolidation creates a more stable and effective marketplace,” he says. Furthermore, Iles notes that a marketplace with fewer but stronger companies will provide the industry with a stronger voice in standing up against its critics and getting across the real economic value of insurance.


The extent of the decrease in auto claims costs seen this year cannot be fully explained by the product reform measures implemented, observes Cooke. “We can’t be sure what is driving this [downward] frequency [in claims costs], I suspect that it could be [consumer] ‘fear’, or at least this is a part of it. This is not healthy, and we have to deal with this.”

Saunders also expresses concern regarding the “how’s and why’s” to the drop seen in auto claims costs, and supports the view that “fear” could be a significant factor involved. In fact, he notes, feedback from auto repair bodyshops indicates that insureds have been paying for repairs of up to $3,000-$4,000 from their own pockets. “The fear factor is there.”


The improved financial condition of the Canadian p&c insurance industry has simply “reduced the temperature from boiling, to a point where we can begin to deal with rebuilding the industry’s public credibility,” says Mayer. In this respect, he emphasizes the need for insurers to “invest in the future” by working collectively together on initiatives that promote a positive image of the industry’s contribution to the economy and its role in disaster prevention.

The level of public trust in the insurance industry has diminished, observes Cooke, “which is hardly a surprise”. He says insurers should take advantage of the current improved market environment to “get the message out…there is a deep need for [public] education of what the industry does”. Cooke also supports the idea of promoting the role insurers play in loss prevention initiatives such as road safety. “We need to partner [with our cause] with other organizations that have strong public relations,” he adds.

“Improving customer service is going to be key in getting the [provincial] governments and regulators onboard [in support of the insurance industry]. This is our first challenge,” says Iles. The second challenge before insurers is the need to maintain pricing discipline as the appeal of taking on new business grows, he warns.


Saunders says that Royal and SunAllaince recently undertook an informal survey of its brokers to identify the top issues of concern to them. The overwhelming response was the need for improved customer relations including better company/broker interaction, better management of the pricing cycle, and achieving market stability, he notes.

In this respect, cycle management is probably the biggest concern confronting insurers, Saunders says. “We [the industry] have not been very successful at doing this [cycle management] in the past, and I can understand why brokers are concerned with [market] stability moving forward. We [insurers] have to compete on more than just price, and react [to market conditions] more responsively to avoid deep [price] turns. We need a
clear plan on how we are going to behave.” That said, Saunders is not confident that insurers will be able to break away from the pricing cycle. “I expect the cycle will continue, but in future, I think [the peaks and lows of the cycle] they will be less severe.”

Cooke says that Dominion has instituted measures that hold each “business unit” within the company accountable for rating impact. And, he observes, “we [at Dominion] do not have growth targets in place, but profit targets. Each of our underwriters have been empowered to ‘walk away’ [from business demanding inadequate pricing of the risk].”

Aviva has also made sure that its underwriters have a “walk away price”, comments Mayer. The insurer has brought in internal “systems” to monitor that adequate pricing is stuck to, he notes. But, Mayer concedes, getting the pricing correct all the time is next to impossible. “Our underwriters will inevitably screw up.” But, he adds, the real danger of a destructive soft market ensuing results when people in the industry believe that such an outcome is inevitable. “The danger at this part of the cycle is that myths will become legends.”

Iles says that ING is focusing on the “bottom-line” and not the “top-line”. The company has introduced more sophisticated “risk-based” underwriting tools to ensure that pricing remains adequate. “We [ING] also test portions of our [risk] portfolio to monitor rate adequacy,” he adds.

Similarly, Royal and SunAlliance is now pricing according to “technical price” and not “market pricing”, says Saunders. He believes that the insurer’s are now more skilled in properly pricing risk than had been the case with the last soft market. “We measure on the bottom-line.”

While each of the insurers represented on the CEO panel say they will maintain pricing discipline moving forward, they were less sure that all the uncertainties and pricing vagaries of the past can be eliminated from the industry’s business process. Specifically, getting reserving at correct levels will remain a challenge, the CEOs say, particularly bearing in mind the unknown full impact the auto line will have on company results. “Getting reserves right is a bit of an ‘art and a science’, we’re [at Aviva] currently reserving on the basis that [Ontario] AB losses will come back,” says Mayer. And, observes Cooke, “I’d be surprised if the industry were able to get away from adverse or favorable reserve developments. The [auto] product changes across the country have been rapid and dramatic. This introduces some uncertainty and risk for the future.”

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