National Broker Market Trends: Action & Reaction?

“For every action, there is an equal and opposite reaction” – so states Isaac Newton’s “Third Law of Motion”. Newton’s theory on force and the interaction of objects no doubt was constructed around loftier notions than commerce and the supply-demand impact of competitive marketplaces. However, the historical performance of the property and casualty insurance industry – specifically that of Canada’s excessively fragmented marketplace – would serve as a prime example of Newton’s theory put to commercial practice.

As many brokers CU spoke to point out, the “hard” to “soft” cycle of the insurance marketplace has been as notorious and predictable for as long as they have been active participants in the industry. So, despite repeated vows by insurer CEOs over recent months that they plan to kick their bad habits of the past, brokers remain skeptical that the traditional pendulum swings of the insurance cycle will be no more.

But, with the trauma of the “super hard market” that drove the past three years of the industry still very much fresh in the minds of brokers, most are simply grateful for the current trickle of returned underwriting capacity, particularly from the “standard markets”. Ken Orr, president of the Insurance Brokers Association of Canada (IBAC), notes, “we’re [the insurance marketplace] are in a disciplined mode. Pricing has leveled off, and there’s more aggressive competition [for business]. The main issue [currently] is that there is greater availability of coverage.”

Feedback from U.S. brokers suggests that market competition is already well heated up south of the border, Orr observes, where larger commercial risks are being renewed with between 10%-15% rate reductions. “Pricing and competition here [Canada] has not been that bold,” he adds.

However, Orr says standard market insurers have begun showing increased interest this year in primarily commercial risks. Much of the easing on pricing, terms and availability of coverage that has so far taken place appears to have originated in Ontario, he notes. “I think everything trickles downhill, and with Toronto being the head-office center for many insurance companies, this is where the markets are reacting first.”

But, Orr does not expect this year will bring about a dramatic change in insurers’ battle-weary underwriting approaches. He points out that, while the overall financial profitability of insurance companies improved dramatically over the course of 2003, there remain many carriers whose bottom-lines remain under pressure – specifically the mutual insurers. “I think this will cause some hesitancy. Looking ahead to the end of 2004, I expect there will be some easing of market conditions in terms of cover availability and more liberal terms of coverage.”

Will insurers break the insurance cycle this time around? Orr is not that optimistic. “When we were at the hardest part of the market, [insurer] CEOs were asked whether they’d go back to ‘cashflow underwriting’. They said, ‘we damn well will if interest rates get back to over 10%’. So, I think the cycle will ultimately continue. All we can hope is that it [the market swing] won’t be as severe as the past.”

ONTARIO’S AMBIGUITY

For the first time in two years, insurers are looking at appointing new broker contracts in Ontario, observes Bob Carter, executive director at the Insurance Brokers Association of Ontario (IBAO). He says, however, that such interest from companies this year has not been “dramatic”. He adds, “the jurors are still out on this one”.

The biggest issues in Ontario are the auto insurance reforms underway and the public credibility of the industry, Carter says. In the first instance, he notes that insurers are being cautious with regard to the potential cost saving benefits of the legislative reforms that kicked in from the beginning of April this year, and will continue into the fall. “Insurers are still reluctant to write [auto business], which is keeping the pressure on brokers [to find markets].” Studies made of the proposed auto reforms suggest that these measures will take off the cost pressures on insurers, he adds, although there are too many unknown variables which could produce a less meaningful outcome. “At the moment, insurers are giving the legislators the benefit of the doubt.”

Carter believes that significant work is required to rebuild the insurance industry’s public image after years of price hikes and then the negative media attention generated around the $2.6 billion profit made by insurers during 2003. “The other challenge is restoring the credibility of brokers in the public eye, we were the ones out on the frontline. Brokers have been fielding questions from clients since the 2003 financial results came out. What people don’t realize is that the return on equity (ROE) of insurers from the Ontario market was 5.3% and not the 11.7% return achieved countrywide. Most of the money was made [by insurers] in Quebec.”

In terms of current market shifts, Carter says insurers are now being more competitive in taking on small commercial accounts. The larger risks are still fetching moderate price increases, he notes, while anything that has potential U.S. exposure remains difficult to place. Personal property is being closely evaluated by carriers, with a range of rating criteria applied. “[Personal property] is being more closely scrutinized.”

Overall, Carter does not expect to see a surge of competition in the marketplace this year, with the financial numbers for 2004 likely to be the determining driver in what/how companies respond in 2005. But, the reduced number of players due to consolidation over recent years, as well as the growing concentration of business among the top-ranked companies, will likely over the longer term see a more stable marketplace, he predicts. “There’s also a change in attitude among [insurer] CEOs in that they don’t want to be the biggest guy in town at any cost. But, an upward movement in interest rates could change all that.”

Looking at the current state of the marketplace, Carter expects 2004 will be a determining year for insurers with regard to their future business strategies. “This year will be a watershed year in terms of whether the [auto] reforms will produce the desired benefits and companies will be able to stabilize [financially]. The outcome will affect us for years to come.”

QUEBEC’S LONGING

Despite the relatively “good fortunes” of insurers operating in Quebec, the province has not attracted new players, says John Morin, president of Morin, Elliott Associates Ltee. “This has been surprising, as Allianz had indicated that they were interested in coming back to Quebec, but this hasn’t happened.” Unlike the other provinces where market fragmentation has been the problem, Quebec suffers from a lack of markets, Morin notes. Notably, Quebec’s brokerages lost a major personal lines market in Lloyd’s of London, which has also cut back substantially on its broker contracts. “The number of markets available to brokers hasn’t increased, which is still bit of a problem.”

However, Morin points out that Quebec has had less of a problem than the other provinces over the past two years regarding overall underwriting capacity. This is largely due to the fact that insurers began implementing rate increases in Quebec long before actions were taken in the other provinces, the result being that claims losses were stemmed at an early stage, he observes. While pricing remains fairly high, there has been an easing this year on commercial lines, Morin surmises, with insurers having brought in “rapid quoting” which is a new development for the marketplace. And, personal lines has generally remained stable in pricing this year, he adds, with fewer coverage rejections occurring.

In looking ahead, Morin notes, “there is no easing up on underwriting guidelines by insurers at this point. Premiums remain high, and I don’t think the marketplace could take any more rate increases.” He predicts that insurers will likely maintain a disciplined underwriting approach over the next two years. “It has been one heck
of a ride over the past three years. I hope all that is now behind us, although we’d like to see more insurers in the province.”

ALBERTA’S PRICING

“At the moment, the marketplace’s problem is more so pricing than capacity,” notes Mark Zemp, president of the Independent Insurance Brokers Association of Alberta (IIBAA). Zemp is upbeat of further improvement in market availability, which he says follows a recent meeting held with IBAC and several key insurer CEOs who indicated that they would be willing to increase capacity in Alberta this year.

Already, the province has seen insurers stepping forward to take on new personal lines and small commercial business, Zemp says. And, while pricing continues to put pressure on brokers, there has been moderate relief on commercial property risks with rates on commercial liability having stabilized, he adds. “Insurers seem to have achieved the point where they should be on premium [rates].”

“Sticky spots” within the marketplace include coverage for roofers and contractors, condominium units, and certain sporting facilities like golf courses. Placing business in these specific segments remains difficult, Zemp says. Otherwise, the biggest market issue for brokers is auto and the uncertainty surrounding regulative product reform. The debate is still very much underway in achieving definition of “bodily injury” under the regulated accident benefits of the mandatory auto product, he observes. “The government is aiming to have this resolved by the end of June, which insurers have indicated that they can implement the necessary reform changes.” With the current rate freeze in effect on auto, this line has not shown much movement, he adds. “Most insurers are committed to staying here [Alberta]. This has been one busy year with auto reform.”

B.C.’S OPTIONAL

The marketplace has been difficult to read, comments David Keen, president of the Insurance Brokers Association of British Columbia (IBABC). Insurers are beginning to let up on the stark rate increases of recent years, with covers on small commercial risks currently attracting upward pricing adjustments of 10%-15%, he observes. However, large commercial risks and those holding U.S. exposures remain difficult to place, he adds. “It’s getting tiring chasing down MGAs [managing general agents] to get the business placed.”

Furthermore, Keen says the homeowners’ line has only witnessed moderate pricing adjustments this year, despite the losses incurred as a result of the province’s forest fires during 2003. The real challenge remains the optional auto market, Keen notes, which few insurers have stepped up to the plate as the provincial government had hoped after having introduced legislative changes to boost market competition.

Overall, Keen does not believe that market capacity has increased meaningfully in B.C., particularly with regard to insurers taking new brokers onto their books. However, he adds, “those markets that had been difficult to deal with are now indicating that they are open for business again”.

Keen is also skeptical with regard to the ability of insurers to break from the cycle. “I started in the business at age 17, I remember my first hard market, and thought this has got to be the end. I find it difficult to believe that it won’t happen again. But, maybe in future it won’t be as extreme as in the past…I’d really be disappointed if we went back to a super soft market after all the hardships that brokers have been through.”

ATLANTIC’S POLITICS

Availability of markets is slowly improving in both New Brunswick and Nova Scotia, brokers report. Bob Kimball, a vice president of IBAC and chair of the N.B. operating committee of the Facility Association (FA), says there have been new broker appointments this year by insurers in the province. And, he remarks, “I have six markets I deal with, and all are keen to write commercial property. A year ago, none of them would touch the business.” A similar situation exists in N.S., observes Peter Fredericks, president of the Insurance Brokers Association of Nova Scotia (IBANS). The availability of markets to brokers has risen slightly since the beginning of the year, he adds, and there has even been a number of new broker contracts signed. Notably, the N.S. marketplace has not seen any withdrawal of companies – at least yet.

Both N.B. and N.S. have been “hotbeds of discontent” as public ire over coverage availability and pricing prompted political debate into the establishment of government-run auto insurance systems. Much hangs on the outcome of the “Weir Report” which was recently released, favoring the establishment of a crown insurance corporation to provide mandatory auto insurance in N.B.

Brokers in both N.B. and N.S. have actively opposed the movement toward government-run auto insurance systems. A big problem has been the significant rise of policyholders in the FA, which serves as the insurance industry’s shared high-risk auto insurance pool, explains Kimball. As part of the lobbying drive to keep N.B.’s insurance system fully private, insurers have begun taking policyholders out of the FA, he notes. The FA set out in January of this year to remove about 7,200 policies from the pool by August. So far, approximately 2,000 policies have been removed from the FA, he adds.

The N.B. government has indicated that it will have a response to the Weir Report by the summer of this year, Kimball says. “I’m an optimist in believing that public auto insurance won’t come to N.B. But, the Weir Report did support using brokers as a distribution channel should such a system come about.” Fredericks points out that, “the Weir Report was a waste of time and money”. He notes that the insurance industry’s proposed “no frills” auto insurance product is actually cheaper in average premium than that put forward under a public system.

While no insurers have withdrawn from N.S., Fredericks says the future for many companies will depend on the viability of the auto product. With many of the issues currently still being reviewed by the provincial government as part of its proposed auto insurance reform package, he notes that the marketplace is in a state of flux. “I think insurers are optimistic, but ultimately it comes down to resolving auto. If an insurer is out of this line, then it may not be worthwhile staying in the province.” However, he believes that the marketplace currently reflects “stability”, and may even be at the very early stages of returning to “softer conditions”. He adds, “this was the hardest and the longest hard market I’ve ever seen. I hope we’ve learnt our lesson this time.”

Kimball says pricing among commercial risks is improving in southern N.B., and other brokers in the province have indicated similar easing of market rates. However, personal property/habitational covers are still attracting close scrutiny by insurers, with pricing still on the rise, he notes. The vigorous attention of insurers toward this line is likely due to property under-valuations revealed through the B.C. fires, which led to higher claim exposures, as well as the fact that the Atlantic region experienced a series of weather-related losses during 2003, he adds.