Lloyd’s: Canada Looking Good Again

Earlier this year, I had the pleasure of welcoming Lord Levene to Canada during his first visit here as Chairman of Lloyd’s. With a major change program at Lloyd’s, the pursuit of reform to reinsurance regulation in the U.S. and new license opportunities in China and Eastern Europe all having dominated his time in office, he mentioned to me that he had not previously focused on Canada and was aware neither of the scope of Lloyd’s business here (in what is the Lloyd’s market’s second largest source of overseas premium income) nor its broad reach across the country in all lines of commercial insurance business.

To an extent, Lord Levene’s comments reflect the attitude of the market generally, which seems to have rediscovered Canada in 2004 in a big way. For the first six months of the year, Lloyd’s total Canadian premium income was up 30% over the corresponding period in 2003, including a 51% rise in direct commercial property business and 40% in direct liability. These two classes now account for 80% of Lloyd’s non-reinsurance business in Canada, which could top the $1 billion mark in premiums for the first time in 2004 if current trends continue. After two years in which Lloyd’s total Canadian business essentially remained flat during a period of substantial rate rises, this marks a notable change in attitude, particularly against a background of Lloyd’s global capacity having increased only marginally over last year.

RIGHT TIME

There are many factors which make Canada a logical place for Lloyd’s underwriters to do business: a nationwide network of approved brokers (over 350 of them), many having their own networks of sub-producers, a leading economy with a diverse set of risks requiring protection, a sophisticated risk management profession, a business and legal environment similar to Lloyd’s other main trading jurisdictions being the U.S. and U.K., a history of over 70 years’ licensed trading, as well as a well-known brand name. Given the hard market of recent years and the steep income rises booked in places such as the U.S. and Australia since 2001, it might be asked why Lloyd’s is only now experiencing growth in Canada. Factors such as the image in the market of Canada being a burdensome jurisdiction (linked to previous high volumes of automobile business and the federal solvency regime) and poor returns in many syndicates’ Canadian books (again often linked to personal lines) have inhibited growth, as were the more attractive rates available in other jurisdictions.

That last factor, rating, has been key to reawakening the interest of many underwriters in Canadian business recently. Many underwriters clearly believe that rates in Canada have risen to acceptable levels for the corresponding risks at the same time as they may be noticing weakening in other jurisdictions. This seems particularly true for larger property business where many risks previously viewed as under-priced are now being written and prospects seem good for maintaining current rate levels in view of the limited appetite of the domestic market.

Whilst in the past, Canadian casualty business suffered from being seen as part of a broader North American scene, underwriters now know that Canada is different. Nevertheless, they maintain a wary eye on Canadian litigation experience, and in particular on the use of class actions, the emergence of a “plaintiff’s bar” and any tendency for the judiciary to practice social justice at insurers’ expense. Continued rate rises are viewed as a necessity by many liability underwriters, whilst their property colleagues may be more tolerant of a leveling off for the right risks.

LLOYD’S ATTITUDE

In his address to the Empire Club during his visit to Toronto, Lord Levene spoke on the theme of “is profitability a dirty word in insurance”. His conclusion was that it is not: not if insurance buyers wish to have an insurance industry able to withstand the type of financial shocks that (as Hurricane Charley reminds us) today’s world can deliver and permit policyholders to protect themselves against risks that could destroy their businesses. And, as Lord Levene also mentioned, it has been a lamentable truth that overall the insurance industry has failed to deliver the type of long-term strength that its customers require, with sub-par returns on equity being the norm, and financial downgrades the pattern of recent years. Lloyd’s has not been immune from these problems, which is why it has committed itself to raising performance and standards with the goal of consistent profitability across the infamous insurance cycle. These reforms, introduced at the instigation of the market will color underwriters’ attitudes to Canadian business in the future.

Lloyd’s underwriters are now operating under business plans agreed with their own management and with Lloyd’s centrally, and results for particular lines and territories are being monitored closely. For Canada, the need to produce returns sufficient to justify the costs of capital imposed by the Office of the Superintendent of Financial Institutions (OSFI) adds an element not present in other jurisdictions.

SPECIAL LINES

Growth in Lloyd’s Canadian premiums has been fuelled by a rising demand for the market’s capacity amongst Canadian businesses. Canada, like the rest of the world, has always looked to Lloyd’s as the leading marketplace for specialist business. As Canada’s society and economy evolve – along with new risks – it is natural that demand for innovative insurance coverages will grow as well.

One topical area is terrorism, where Lloyd’s is writing increasing volumes of business in new stand-alone product lines – including the lion’s share of the “nuclear pool”. The fact that terrorism has been taken out of many basic products also illustrates a second reason for increasing demand for specialist products – the changing nature of the industry with many domestic carriers reducing their capacity in several of the more volatile commercial classes and concentrating on smaller/medium general business.

FUTURE STAND

Lloyd’s therefore enters the lead-up to the January 2005 insurance renewal season with record Canadian business premium volumes and significantly greater amounts of capacity committed to commercial business. With the work of the Lloyd’s franchise performance team taking full effect, growth for its own sake is not the market’s goal. The continued ability of our underwriters to make profits on their business in Canada will be key to decisions on renewals and new business, making this season, and its place in the insurance cycle, an intriguing one. But as long as current conditions persist, Canada will continue as a market of great interest to Lloyd’s.