Keeping the Wolves at Bay

When insurers lose sleep at night, they often worry about water damage and the escalating costs of Ontario auto insurance claims. But the lasting impact of the world’s 2008-09 global financial meltdown has added a new dimension to the terrors potentially wrought on Canadian primary insurers’ balance sheets.

Now insurers must not only must face escalating costs related to more severe weather events and auto insurance claims, but they must do so without heavy reliance on an important tool in their financial arsenal — investment income. Despite the economy’s partial recovery, insurers still anticipate shrinking investment margins arising from suppressed interest rates.

Governments throughout the world have kept interest rates low in response to ongoing market turmoil, thus giving insurers much less wiggle room to deal with escalating claims costs. Increasingly, insurers will not be able to afford to use investment money to shore up lax underwriting results. Underwriting profit is now key. To increase growth objectives, companies are increasingly focusing on investing in new technology to improve their reach to consumers.

But just when insurers think it’s safe to go back to the theatres, a new danger seems ready to emerge — inflation. Inflation is anticipated as the economic engine finally starts to roar again, putting new pressure on claims costs.

These trends emerged in our Primary Insurance Market 2011 Outlook, in which we asked senior executives of Canadian property and casualty insurers: ‘What do you see as emerging financial and/or claims trends in the upcoming two years?’ Their answers are listed below, in alphabetical order by last name.

1 Kathy Bardswick, President, CEO, The Co-operators Group Ltd.

The industry will be closely following different claims developments in different parts of the country in 2011, and generally I am cautiously optimistic about the prospect of some improvement this year.

The trend of increasing costs related to weather is not going to be reversed anytime soon. However, I am encouraged by the amount of attention the issue of flooding is beginning to receive. I am hopeful the momentum will continue and ultimately lead to real solutions through which we can bring some form of flood response to homeowners.

In southern Ontario, clearly all eyes will be on how well the auto insurance reforms implemented this past September will actually help control claims costs.

I expect interest rates will increase somewhat in 2011. The benefit for claims reserves and market yield adjustment, however, will be more than offset by the loss of value on bond portfolios. Also, given OSFI is contemplating having equities require substantially more capital support for MCT, some companies’ capital ratios may be affected quite considerably.

2 Barbara Bellissimo, Senior Vice President, State Farm Insurance Canada

At State Farm, we’ll be closely analyzing the impact and evolution of Ontario auto reform. This is essential to improving our financial performance and providing an affordable auto product to our customers. In particular, we need to understand how these reforms will mitigate the increasing costs of accident benefit claims and how they will stem the tide of fraudulent claims activity. We have reacted to the increase in fraud by stepping up our efforts internally, adhering to our strict guidelines and introducing additional dedicated resources, primarily in the interests of safety and providing a continuously affordable auto product.

Regarding personal property, we continue to see an increase in the frequency of water losses. Together we need to cooperate with municipalities to ensure the evolution of adequate infrastructure and provide research and feedback on the next generation of loss-resistant construction materials and techniques. These efforts will considerably help to mitigate future large-scale loss and community disruption.

Another significant area is our commitment to engaging our customers via new communication technologies. Our organization and agency force will continue to make ourselves available to our customers via social media to ensure we are accessible to them when they need us most. This makes it easier for them to stay in touch and contact us when they need us; it is paramount to maintaining the utmost in customer service. Social media technologies align well with State Farm’s core brand values, which center on people, relationships and personal service.

3 Jean-Francois Blais President, CEO, AXA Canada

What do the fashion industry and the insurance industry have in common? We both use models and try to find the next trend. We all know finding and understanding new trends is very valuable.

Trends are key to the insurance industry because of the nature of our business. We collect premiums now and we pay claims later. The cash flow model is very strong, but trends create risks. Nowadays, the general trend is de-risking the corporate balance sheets.

On the assets side, regulators, with the support of governments, are pushing hard to reduce risk in banks and insurance companies after the financial crisis of 2008. Regulators are pushing for better-quality assets and more liquidity. In the real world, this translates into lower returns from everyone’s investment portfolio.

On the liabilities side, you find claim revenues where you forecast future inflation. Two trends easily identified but very difficult to measure include inflation coming from bodily injury claims and weather-related events.

On the capital side, the story is similar: regulators want more capital to support the business.

All these trends are putting enormous pressure on underwriting performance. Mastering pricing, underwriting and claims will be more important than ever to be successful in the next decade. Let’s hope it will make insurance more “fashionable” to attract the right talent we need in the years to come.

4 Charles Brindamour, President, CEO, Intact Financial Corporation

As industry conditions gradually improve, primarily in personal lines, we remain cautious about the prospects of the industry. The uncertainties and concerns about the slower pace of the global economic recovery and the fragility of the international financial markets are mounting.

The reduced growth prospects of the North American economy, the dire financial position of a number of European countries and the initiatives of countries with emerging economies to better control their inflation will exacerbate the volatility on the financial markets. These conditions not only lead to pressure on financial institutions here and abroad but also translate in an interest rate environment at historical low levels for the foreseeable future. As a result, the investment performance of the industry will dampen and affect its overall profitability. With the industry return currently under pressure, this calls for discipline.

The consumer is likely to see another year of financial pressure and experience material changes both in home insurance and in automobile insurance, particularly in Ontario. This will be another trying year in terms of the consumers’ perception of our industry. This is why insurance companies need to learn from the brokers’ customer-driven mindset in adapting their ways of operating to the evolving needs of consumers.

We strongly believe this environment will create opportunities for entrepreneurs, be they brokers or insurers, with a strong customer-driven mindset and a solid financial foundation.

5 Alister Campbell, Chief Agent, CEO, Zurich in Canada

Earlier this year I gave a speech entitled “95 is the new 100.” I meant that if interest rates remained at atypical, historic lows for any sustained period, traditional metrics like a 100% combined ratio just wouldn’t apply anymore. Eleven months later, this warning is turning into blunt, unvarnished reality.
Yields on fixed income securities — especially secure, government-backed ones — are at record lows, and governments worldwide are working hard to keep them that way (a slow-motion recovery of our economy is contributing to the issue). Our industry generates almost 100% of total profits over any cycle through investment results. But in this new low-interest-rate world, an underwriting profit is not a luxury anymore — it’s mandatory.

Last year in this magazine, I argued for the merits of “doing the boring things well.” (‘Boring is Beautiful,’ Canadian Underwriter, July 2009). It remains good counsel.

For companies, it is of critical importance to invest in sophisticated technical pricing models and rigorous risk inspection and selection.

For brokers, the discipline of maintaining a strong new business pipeline, keeping an eye on receivables and investing in good customer service will matter more than ever.

For both companies and brokers, picking the right partners for the future will be the difference.

Oh yeah, one year from now I might be writing about the risk of inflation. And you thought deflation was bad for the industry!

6 George L. Cooke, President, CEO, The Dominion of Canada General Insurance Company

Heading into 2011, North American economies are sluggish. They will likely continue that way for some time, intensifying the pressure on the operating performance of all insurers and brokers. With the dependability of investment returns and economic cycles in question, cementing sustainable operating profit will increasingly be the focus.

The continuously evolving backdrop of reform, weather patterns and consumer expectations only adds further complexity. The individual company response in the last few years has been directed inward, with a tendency to focus on developing unique competitive advantages. In doing so, we have likely neglected the piece that may matter the most.

A transparent marketplace working in the best interest of the consumer will define the market structure and ul- timately determine our profitability in the years to come. In an age when consumers are more savvy, more educated, and where the exchange of knowledge is immediate among them, the need to establish and maintain trust and confidence in the services we all provide becomes paramount to individual corporate objectives. We need to evolve the rules at play in the industry; more importantly, we need to evolve our collective willingness to support and adhere to those rules.

With the threat of inflation on the horizon, pressure from consumers will intensify. They will demand transparency; they will want to know exactly how far their insurance dollar goes. We had better be ready to explain — with one voice.

7 William Goings, President, CEO, TD General Insurance Company

Over the next two years, I think we’re going to continue to feel the impact of many of the same global trends that are already affecting our industry. The sluggish economic recovery continues to take its toll and we expect to see slow economic growth and low interest rates as a result.

On the claims side, I think the home and auto industry will continue to feel the effects of weather and climate hazards. Ten years ago, fire and theft were the two main causes of home insurance claims; now we’re seeing water damage as the main culprit. Fraud also continues to be a growing area of concern industry-wide, and we expect this will likely have an impact on claims in the coming years.

Considering the combined impact of these financial and claims trends, I think the insurance industry will feel more pressure from consumers for competitive and affordable insurance options. Our clients are already asking for insurance that’s simple, convenient and easy to understand. For TD Insurance, the next two years — and beyond — will continue to be about good service and providing consumers with the products they want, from a name they trust.

8 Christopher R. Kiah, President, CEO, Allstate Insurance Company of Canada

Ontario automobile insurance is the biggest challenge and greatest opportunity facing our industry over the next two years. Ontario results have a tremendous impact on the rest of Canada, placing a significant responsibility on one market and one regulatory system. It is too early to tell whether the most recent Ontario auto product reforms will succeed in addressing cost pressures and abuse in the system. Of particular concern are the catastrophic impairment definition and the minor injury guideline (MIG). The industry should be an active participant in the catastrophic impairment review and, to be effective, the new definition must be scientific and research-based.

A new minor injury treatment protocol is expected to replace the current MIG, but not until 2013. Allstate will continue to monitor the performance of the MIG closely and our industry must urge the government to make changes in the likely event that anticipated cost savings are not met.

Property results continue to be under pressure across the country for several reasons, including more extreme weather patterns, aging infrastructure and insurance-to-value challenges. This may be a relatively recent trend, but it appears to be here for the foreseeable future. Personal property insurance has evolved considerably over time and now provides comprehensive protection for a customer’s home and personal belongings. Water losses, though covered throughout recent history, were never thought to be such a costly area for the homeowner line. As an industry, we may need to consider tightening the definitions around the product. Otherwise, loss ratios and prices will continue to rise.

9 Kevin McNeil, President, CEO, Gore Mutual Insurance Company

We will continue to operate in an environment of escalating claims costs in the upcoming years. Several factors are contributing to this, including more severe weather patterns, benefit-rich products and vendor consolidation. Gore Mutual has invested in technology in the claims area to control expenses and improve workflows for our broker partners and their clients.

In an age when consumers expect immediate responses, our industry needs to raise the bar. Brokers require direct connectivity with insurers and vendors. With the launch of Gore Mutual’s Claims Connection, brokers can access real-time claims information to provide immediate and accurate responses to their clients.

Technology is also paving the way for improved statistical claims data. We look forward to our industry benefiting from the Health Claims for Auto Insurance (HCAI) project. Gore Mutual was the first company to complete the technical integration and was one of two insurers to go live when HCAI was introduced. HCAI will act as an early warning system in identifying claims trends so our industry can respond quickly.

As claims costs continue to rise, it will be necessary for insurers and brokers alike to leverage technology if we are to provide a stable market and improve customers’ experience at the same time.

10 Ellen Moore, President, CEO, Chubb Insurance Company of Canada

In 2011, we expect to see a continuation of the trends and conditions we have seen in the last few years. Excess capital will continue to support soft market conditions, despite significant evidence of profit deterioration. Consolidation among insurers and brokers will continue, affecting the ability for insurers to grow top line. Regulatory pressures will increase with the implementation of legislative changes. Lastly will be the impact of the global economy in which we operate. Although Canada remains a relatively stable environment, global influences are challenging our industry’s ability to grow and stay financially strong.

Success in 2011 will require more diligence than ever. The volatility of financial markets will make financial strength and stability much more important to consumers. Ma
naging our balance sheet and our underwriting profit remains our top priority. As always, managing distribution relationships will be critical. We remain committed to our network of strong, independent brokers. A healthy, competitive market means a well-served customer. Improving the customer experience is at the top of our ‘to do’ list for 2011.

11 Gary J. Owcar, President, Chief Operating Officer, CNA Canada

Over the past few years, the calendar-year financial results of many companies have benefited from significant favorable reserve adjustments for prior years. With the general expectation that there is not much left in the way of redundant reserves, the industry has to tackle the following claim issues to ensure continued profitability.

First, it must manage continued increase in claims handling and legal costs due to:

• insureds being named as plaintiffs in more and varied types of claims. The duty to defend adds legal costs regardless of indemnification;

• taxation changes have increased claim costs (HST in Ontario) and;

• claims-handling infrastructure must meet consumers’ 24/7 demand for

service. Second, the industry must manage an increase in indemnification dollars due to:

• the increasingly litigious environment in Canada, including the emergence of class action suits and growing damage awards;

• expanded general, special and heads of damage on claims, increasing potential award amounts; and

• the continued erosion of the auto threshold in Ontario and increasing

catastrophe costs. Proactive companies need to consider technology solutions to reduce costs and increase efficiency. Procurement management is also a key cost reduction tool for both ongoing claims and catastrophe support. Vendor incentives to meet specific corporate objectives such as customer service or close times would give vendors more “skin in the game,” producing a better loss result. As another year of thin pricing appears on the horizon, managing loss costs and general expenses will be more important than ever.

12 Sylvie Paquette, President, Chief Operating Officer, Desjardins General Insurance Group

From a financial perspective, I think we can expect more of the same: a slow-growth economy, very low interest rates and uncertain, even jittery equity markets. This means insurers must focus even more on the insurance fundamentals: pricing, underwriting and claims.

However, in a slow economy, with some provincial election cycles coming up, it may be difficult to gain approval for needed auto rate increases. Insurers unable to generate underwriting profits may find themselves in serious financial difficulty.

As far as claims trends are concerned, we are alarmed by the degree of organized fraud that continues, particularly in the Greater Toronto Area and some other large cities. The trend towards caused accidents, which involve innocent third parties, is of particular concern because they are dangerous and difficult to prove. That being said, the industry is being more proactive and police and government are beginning to take the issue seriously, so there is some hope.

Another trend concerning us is the increasing frequency of catastrophic events. Severe and unpredictable weather events, coupled with aging infrastructure in so many communities across the country, makes for a deadly — or at least costly — combination.

Overall in claims, the challenge is to become much more sophisticated in managing catastrophic and other complex claims through better techniques, technology, staff training, and client education.

13 George Petropoulos, President, CEO, Travelers Guarantee Company of Canada

The Canadian economy has fared better than most of the global economy, but the Canadian insurance marketplace continues to face challenges. The sector continues to be competitive and is seeing new capacity. Additionally, there are increasing claims costs, partially driven by the new Harmonized Sales Tax (HST) in Ontario and British Columbia. Due to marketplace dynamics, our industry may be challenged to achieve historical returns and may lag the economic recovery seen outside the industry.

To address this, Travelers intends to remain disciplined in pricing, segmentation and underwriting. We think brokers and insureds will look to align themselves closely with insurers who can offer the financial strength to pay claims when they arise and who are committed to taking a long-term view of the Canadian insurance marketplace.

Travelers Canada, comprising St. Paul Fire and Marine and Travelers Guarantee, has been well positioned to manage the issues that have impacted the industry over the last few years. We remain focused on providing quality products and services to our customers, while building long-term and mutually beneficial relationships with our brokers. We are also significantly investing in our systems and employees to better support our brokers and customers in the future.

14 Rowan Saunders, President, CEO, RSA Canada

At RSA, we’ve long held the view that consolidation is necessary in our industry. In 2010, we’ve seen some assertive mergers and acquisitions (M&A) activity. I believe we will see a fundamental restructuring of the industry over the next couple of years. It’s RSA’s intention to be at the forefront.

Half-year industry results have improved in 2009 and 2010, but there is still quite a divergence in results between companies. This is going to drive consolidation, since companies with strong balance sheets and strong cash flow are in a position to acquire. The 30-year industry average ROE is about 10%, and we’ve seen far lower returns over the past three years — 5.9% in 2008, 7.9% for 2009, and 8.7% at the half-year of 2010, indicating the pressure several players are facing.

In commercial lines, premium growth is modest, reflecting the impact of the economic downturn and the competitive stage of the cycle, though we are seeing a slight but definite increase in rate. Insurers with a heavy focus on specialized commercial portfolios and sophisticated underwriting and pricing strategies will continue to see stronger results than those focusing on general personal lines.

Personal property portfolios are struggling to adjust to increased rate and obtain insurance-to-value accuracy. At the same time, they must adjust to intense weather events driven in part by our changing climate. Significant claims trends continue to be dealing with intense weather and ever-evolving auto reforms.

As if dealing with these trends is not enough, what I find particularly interesting on the claims side is the change we’re seeing in customer expectations. A consumer expects 24/7 service, an easy experience and a quickly-settled claim. The claims area is a significant point of differentiation for RSA and I think we’re going to see insurers put a lot of emphasis on enhancing their claims proposition in the next 12 months.

15 Maurice Tulloch, President, CEO, Aviva Canada

On the financial side, no one can dispute the ongoing pressures on Canadian property and casualty insurers including declining bond yields, the threat of inflation and the cost of increased regulation. These are significant, but we have successfully dealt with similar economic and financial challenges in the past. However, on the claims side, the potential unknowns of climate change could be game-changing for our industry.

Weather patterns and events have always been a significant factor in the property and casualty business. But as loss statistics show, that risk is clearly growing, the effect is severe and the trend is not expected to abate. The country’s aging infrastructure and the response capabilities of all governments, our industry and Canadian property-owners are being tested.

Consumers expect our help. They expect us to understand, prepare for, provide coverage and effectively
respond to these events with support when they need it. To deliver on this, the industry must continue working with municipalities to understand thoroughly the current state of infrastructure and its maintenance.

At Aviva, we are continuing to provide coverage in high-risk areas, at the right price, guaranteeing product availability. We are also working with brokers to increase consumer awareness of their coverage so they can understand how climate change affects them.

Aviva supports the strong leadership the industry has shown on this issue. We commit to being a part of that effort and working with our broker partners to help Canadians adapt to climate change and stay protected.

16 Noel Walpole, President, CEO, The Economical Insurance Group

In the financial arena, regulators will want companies to take a more conservative approach to capitalization. We don’t anticipate much change in interest rates or yields on the investment side, so investment income will remain negligible compared to past years. All of this places a higher demand for an operational profit through underwriting.

From a claims perspective, we expect a continuation of the same weather-related losses over the next two years, with water damage being the primary loss. We expect to experience temporary relief from in-f lationary escalation of Ontario auto claims. After 24 months, we’ll start to see an erosion of cost containment because of challenges made to the Sept. 1 auto reforms.

The years 2010 and 2011 may show improvements for the industry in Ontario auto, but unless rate adequacy is achieved, this improving trend will not continue.

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The trend of increasing costs related to weather is not going to be reversed anytime soon.

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The impact and evolution of Ontario auto reform is essential to improving our financial performance and providing an affordable auto product to our customers. In particular, we need to understand how these reforms will mitigate the increasing costs of accident benefit claims and how they will stem the tide of fraudulent claims activity.

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Regulators are pushing for better-quality assets and more liquidity. In the real world, this translates into lower returns from everyone’s investment portfolio.

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One year from now I might be writing about the risk of inflation. And you thought deflation was bad for the industry!

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Insurers with a heavy focus on specialized commercial portfolios and sophisticated underwriting and pricing strategies will continue to see stronger results than those focusing on general personal lines.