Last to Receive

The property casualty insurance industry in Canada has basically three constituents to satisfy: consumers, regulators and investors. The expectations of these three groups can be very different, and in some cases conflict with each other. As the second half of this decade unfolds, the success of our individual ventures and our industry as a whole, will depend on how we respond to and address the needs and expectations of these constituents.

Consumers represent our key audience, and their willingness to accept our “product” in the future will largely determine whether we remain in business. Insureds are looking for transparency in their dealings with insurers, whether direct or through an intermediary, and are increasingly focused on the need for easy to understand contracts and “unbundled” pricing structures to better assess value at each point in the transaction. And, they also demand responsiveness in terms of both service and customization of product.

Regulators are a significant constituent and consume a growing percentage of our efforts as an industry, not only in the area of regulatory compliance, but now in terms of market conduct and competitive control. Federal and provincial privacy legislation, compliance with Sarbanes Oxley-type regulations and securities laws, form a growing part of our day to day activity.

The third constituency, our investors, continue to expect competitive returns on funds whether they are “arms length” or “hands on”. When considering this group, the definition of investor should include parents of Canadian branch operations and ultimate parents of Canadian subsidiaries. In addition to adequate return on investment they will be looking for a degree of “portability”, or a method to deploy capital in other jurisdictions when it is not required to support underwriting activity in Canada. They will also be looking for more accurate forms of measurement than we have used in the past. In short, a much more articulate model for managing their own capital.

PRECARIOUS LANDSCAPE

Within this market backdrop, it will be necessary for insurers and reinsurers operating in Canada to work with brokers and other intermediaries and service organizations to plan their activities with a proper balance between long-term and short-term objectives. Successful operators over the next few years will be exemplified by those who are able to change direction quickly in response to emerging trends and those with an entrepreneurial or even opportunistic approach.

Making accurate predictions in such a volatile market is virtually impossible. For example, who would have predicted 12 months ago that within the space of one year, hurricanes Charley, Frances, Ivan and Jeanne would consecutively hit one geographic area in the U.S. and cause an estimated US$22 billion in damage. This was significantly greater than the damage caused by Hurricane Andrew in 1992 (even when adjusted to current value dollars). Who would have predicted that an earthquake under the ocean in Southeast Asia that would result in a tsunami of such magnitude that it took at least 150,000 lives and caused extensive damage in countries as far apart as Indonesia, India and East Africa. And, not least of all, who would have predicted a New York attorney general would take on the insurance distribution structure and within a very short period of time dramatically change the way many insurers have traditionally dealt with broker remuneration.

Notwithstanding the inherent difficulty in making accurate predictions, there are some “signs” which have a direct correlation to the cause and effect impact of what is taking place in our marketplace. Some are obvious, some have already begun, and some will be the direct consequence of other events unfolding outside of our industry. They are as follows:

* Property rates will generally hold or reduce;

* General liability rates will decrease for “run of the mill” risks;

* Specialty liability (professional indemnity, etc.) rates will vary greatly depending on underwriters perception of the direction of court decisions in Canada;

* The catastrophe market will continue to expand from its base in Bermuda as additional capital finds its way to that market and looks for effective deployment;

* Large insurers are likely to become less “broker sensitive” as they pursue their own objectives;

* Niche insurers will continue to gain ground assuming they can maintain flexibility;

* Middle market insurers will be under continued pressure particularly from their financial supporters;

* Larger brokers will have to find income to replace profit commission, probably through “unbundled” fees for service;

* Medium to small brokers will have to work harder to keep clients but this also represents an opportunity;

* Commercial insurance buyers will become more skeptical and probably less loyal;

* Regulators will become more proactive particularly in areas of “market conduct”;

* Corporate governance will continue to be a significant issue;

* Directors’ and officers’ (D&O) coverage exposures will begin to crystallize largely as a result of the insurers recognizing a changing legal environment;

* There will be more consumer activism and a significant increase in class actions;

* Technology will be used more effectively with an increased reliance on “artificial intelligence”;

* Breaches of privacy within corporate entities will become a growing source of litigation;

* Privacy in society may become less important, for the common good;

* There will be continued prosecutions for regulatory misdeeds in the U.S. and some in Canada;

* Tort reform will continue in the U.S., but the “reality” of any benefit to insurers will lag behind the “promise”;

* Ontario automobile insurance losses will continue to be a significant issue;

* Some new capital will come to the Canadian insurance marketplace, but with very high expectations;

* Some capital will leave the market through repatriation by parents of branches or ultimate parents of Canadian subsidiaries;

* Consolidation of insurers will accelerate;

* Consolidation of brokers will likely slow down (until the value cycle is restored);

* Alternate distribution channels will continue to be a threat to the broker distribution network;

* Globalization of financial services will have an increased impact on Canadian branches and subsidiaries;

* Direct writers will continue to grow but will be unlikely to achieve significant marketshare;

* There will be continued growth in the number of natural disasters around the world;

* There will likely be one or more significant acts of terrorism in North America;

* Sarbanes Oxley and other similar regulatory issues will continue to require significant attention;

* Data management and analytical skills will be at a premium; and

* There will be less overall employment opportunity and more outsourcing, but still a significant need for qualified practitioners.

THINKING AHEAD

If we frame our strategic plans around some of the above factors, and keep a close eye on new signs as they emerge, we will not only survive but prosper. As an industry, we need to move away from the thought of being continually “at the crossroads”. We are on a journey, and there may be some intersections, the road may have some potholes and our “vehicl
e” may need a tune-up, but we must keep moving.

To extend the analogy, our organization may be an eighteen-wheeler, a sedan, a sports-car or a bicycle, but there is room for everyone on the road, even pedestrians. Insurers can not afford to fall into the trap of spending all their time “fine-tuning” their vehicles and complaining about the condition of the road – doing so means we will miss the “signs” along the way.

While you may disagree with some of the thirty-two market factors outlined in this article, or you may perhaps interpret the outcome of them differently, one thing is absolutely certain – the future will be an interesting ride.