Primary Insurance Outlook 2008: Making the Magic Last

Year 2007 is almost at a close, and while the industry results have generally been good this year (following a second straight relatively catastrophe-free season), they have not been stellar, and they have noticeably deteriorated compared to the 2006 results.

This has insurance company CEOs wondering how they can sustain the good financial results of the past two years beyond 2008-09, when many are predicting rate hikes will usher in the beginning of a hardening market.

Until those days come, however, there are many questions about what primary insurers flush with capital might do to expand their market share.

One possibility is to reduce rates to facilitate the underwriting of new business, and signs of this occurring have CEOs calling for continuing market discipline.

Another option is for companies to grow market share through acquisition or consolidation. Such a strategy has caused considerable debate within the insurance community as it relates to the acquisition of brokerages by insurance companies. A number of CEOs have made it a priority to speak publicly over the past year on the topic of broker independence.

As we approach the renewal season, Canadian Underwriter asked 12 CEOs (representing Canadian primary insurers) to discuss their top priorities going forward into 2008. Their responses follow in alphabetical order by last name.

Jean-Francois Blais

President and CEO,

AXA Canada Inc. — Group of Companies

Once again I am very pleased to share with you the AXA vision for the next few years. To highlight a few facts: although industry results are deteriorating, and there is a vast spread in the results from company to company, AXA’s results in Canada have improved over last year, which was a record year for us. I need simply to stop here and say thank you to our brokers for a very successful 2007.

AXA’s ambition is to become our brokers’ preferred company. To achieve this goal, we will invest our time and resources according to a long-term view; we will not allow short-term market conditions to compromise our commitment.

Our priority at AXA is to grow our brokers’ business. To this end, we are focused on enhancing our product offerings. Most recently, we launched the new, two-year auto policy. This followed our auto/property combined policy and our new benefits package for seniors, available to all AXA brokers. Our strategy is to position our products from a pricing standpoint to be among the best in the industry.

To improve service and productivity, we will continue to invest in developing a single-entry environment for our brokers by using efficient connectivity. AXA has also dedicated substantial funds to support brokers willing to make acquisitions and maintain control of their organizations.

As they say, it’s always easier said than done. Delivery and results will speak volumes. At AXA, we are passionate about what we do and we believe in our goals and our future. We are committed to our brokers as partners and we align our initiatives for our mutual benefit. Together, we will win market share in 2008!

Charles Brindamour

Chief Operating Officer,

Incoming President and CEO,

ING Insurance Company of Canada

With 2007 coming to a close, we can look back upon the past year as a good one for both consumers and the insurance industry. Consumers continued to enjoy enhanced products and lower premiums, and, barring any adverse or dramatic developments, the industry’s profitability and capital position remain healthy.

However, given developments over the past few months — when the industry’s profitability deteriorated and capital markets were highly volatile — 2008 could turn out to be a year of turbulence.

The current low price levels and the increases in claims costs will continue to put additional pressure on the industry’s underwriting and overall profitability. Under such conditions, insurers must be vigilant about identifying trends at early stages and responding appropriately. These actions will help us better manage the historical volatility of the business cycle and avoid recreating a situation similar to the one that affected us all back in the early years of the decade, when a delayed reaction to trends forced major premium adjustments and a decline in consumer confidence.

The favourable conditions of the last few years significantly contributed to the improved consumer perception of our industry. In addition to a number of industry initiatives on the regulatory front, many insurers and brokers worked hard to develop innovative and enhanced value propositions and to better deliver them to a changing marketplace. However, consumer expectations are higher. It is therefore imperative to continue to raise the bar by approaching all our activities from the consumer’s perspective and responding accordingly.

A volatile environment and changing consumer expectations provide favourable conditions in which entrepreneurs can thrive. In periods of change, consumers attach ever-greater value to the advice and personalized service brokers offer. By building on their agility, drive and intimate knowledge of consumers, brokers will be best positioned to flourish. We strongly believe entrepreneurs can fully leverage their strengths when they are free to choose how best to serve their customers. One of our key priorities, therefore, is to continue to support the brokers in growing their business through enhanced offering of products and services, technology, training, marketing support and financing that are tailored to their respective situation.

By proactively anticipating market conditions and becoming more attentive to the consumers’ needs and preferences, underwriters and brokers will be in a better position to maintain the confidence of consumers now and in the future.

Alister Campbell

Incoming President and CEO,

Zurich Insurance Company in Canada

Canada’s strengthening dollar is a powerful symbol of how global capital markets see our thriving economy and our strong positioning for the future. Our diversified resources-and-services economy, with expanding export markets beyond the United States, will create unprecedented windows of opportunity for Canadian companies and their broker and insurer partners.

More mid-sized Canadian businesses are using technology to expand into the global arena, proving you don’t have to be a massive corporation to operate globally. Although our manufacturing sector may feel increasing competitive pressure because of the dramatic strengthening of our currency, most Canadian businesses are expanding and growing — and the insurance industry stands to benefit from the resultant demand for more coverage and services.

As we head into 2008, insurers will be looking for ways to work closely with customers and brokers to maximize growth in new and emerging segments. We see increasingly complex demands from these customers, who are looking for specialized and customized solutions to help them better manage their risk. Creative, competitive and responsive insurers that can deliver innovative products, risk insight and international capabilities stand to benefit. These insurers will be able to craft new value propositions and customer-focused solutions to meet the evolving needs of specific target segments of Canada’s rapidly evolving business landscape.

Looking beyond our specific corporate or broader national interests, the issue of our changing climate demands global focus and local response. As a wise underwriter told me recently: “I don’t know what’s causing it, but we’re seeing a lot more water.” Taking action to reduce the negative effects of global warming is necessary, but it’s not necessarily enough. Despite our best efforts, global greenhouse gas emissions are forecast to rise. Perhaps more significantly (for an industry rife with concerns over catastrophe capacity and coverage availability for
high-risk areas), it is imperative we understand the longer-term impact of our changing environment — and how our clients’ needs for coverage and protection must adapt to respond. I suspect we will be challenged to support our customers and industry with this issue into 2008, and well beyond.

George Cooke

President and CEO,

The Dominion of Canada General Insurance Company

The industry in 2007 is experiencing the inevitable deteriorating profitability caused by the soft market conditions over the last couple of years. An important question remains: how accurate are auto claims estimates, given reforms introduced in late 2003 and 2004? Some are more optimistic than others. Let’s hope we don’t see the type of sticker-shock correction consumers had to deal with in the last hard market, when the optimists of that time finally accepted reality. I hope the optimists are right this time, but the reality is likely not the good news they are expecting.

Other underlying concerns will affect insurance consumers when hard market conditions emerge. The hunger for market share by some — at the expense of keeping the fundamentals right — might force industry issues into abeyance until conditions allow for action. For example, insurance to value, increasing weather-related losses and reduced earthquake deductibles in B.C., combined with the increase in property claims inflation, could create a potential surprise for consumers when the market turns.

The purchase of brokers by insurers is another issue that might damage our industry’s image. Captive agents masquerading as brokers — falsely implying that captive agents are independent and represent the priority of consumers’ interests and choice — might not pass the consumer’s smell test for transparency and integrity. Whether or not there is a political response will depend on consumer sentiment at the time.

Insurers should not own brokers. Rather than deliberately confuse the consumer, let’s call an agent an agent. The value of the independent broker channel, built over decades, is directly related to the trust they have earned with consumers. This goodwill is in danger of eroding or disappearing. While this could be good news for some, that definitely does not include Canadian consumers.

The decision to sell direct or buy brokers obviously makes sense to insurers that see this as a way to meet market share commitments or aspirations. I disagree with the approach, but I can see their logic. The actions of their competitors, however, which help them along to their own long-term detriment, are more difficult to explain. Using skilled human resources, capital and goodwill to grow business in competitor-controlled brokers strikes me as myopic. This is particularly so when the same company owners have proven that they will take the business they want, when the time is right for them. Not only that but, if these same insurers stepped out, the company-owned broker model wouldn’t work.

Independent brokers offer the best deal for consumers, period. The Dominion’s strategy to distribute products solely through this channel is based on consumer research and sound economics, not sentiment. Our view is long-term, and we are staying the course. We look to the future with enthusiasm and confidence.

Charles Lawrence

President and Chief Operating Officer,

CNA Canada

As many have predicted and feared, evidence exists already that the Property and Casualty insurance market is heading for a downturn. According to the Office of the Superintendent of Financial Institutions Canada (OSFI), net investment income and underwriting income have declined, while total claims and expenses have increased over the same period last year. Rating agencies such as A.M. Best predict “a prolonged soft market ahead” for Canada.

Two areas of concern pertaining to this downward trend include: lack of commitment by insurers in maintaining underwriting discipline, and the failure of all of us, insurers and brokers, to educate the public effectively on the fundamentals of insurance.

Strict “underwriting discipline” has been the mantra of senior insurance executives for quite some time. It is not unusual to read an article or listen to a speech or panel discussion without underwriting discipline being a central theme. Unfortunately, most of these regular discussions also focus on recently lost accounts following an insurer’s decision to decrease rates by 20%, 30% or even 50%!

It’s evident insurers price new business opportunities differently than they do for “proven” renewals. The solution to this problem is not easy or straightforward; a key component is the need for underwriting discipline. As insurers, we need to “stick to our knitting” and stop entering or re-entering markets just because it seems safe and profit is secured. Expertise is critical for long-term, sustained profitability.

Educating insureds and increasing consumer confidence is everyone’s responsibility, but little evidence exists that insureds have a better understanding of the property and casualty industry and its pricing. Having said that, I applaud the few — the Insurance Bureau of Canada (IBC), for example — that have taken a proactive approach towards educating the public on insurance. Over the years, IBC has launched various information awareness campaigns to raise consumers’ general knowledge and understanding of the insurance industry.

Every insurer and broker must acknowledge that success in maintaining pricing stability and customer confidence is a joint, concerted effort. Maybe then, we can improve public perception and achieve a positive, lasting image for the property and casualty industry.

Kevin McNeil

President and CEO,

Gore Mutual Insurance Company

Gore Mutual is alarmed by the damage caused by insurance companies pursuing broker acquisitions. Consumer confidence in our industry is being eroded and we will all pay the price.

Gore Mutual believes independent brokers best serve consumers. We have made the hard decisions when it comes to demonstrating our support and commitment to the independent broker channel. We have ended long-term relationships with brokers who have sold a major interest to an insurance company. We applaud other insurance companies that have made similar decisions, and we challenge insurers that claim support of independence while at the same time continuing to do business with company-owned brokerages.

Consumer confidence issues are not new to our industry, but this latest threat is severe. Consumers do not yet understand the issue and assume all brokers offer unbiased advice. It’s why they choose to work with a broker. Consider the professional advisors to whom you turn. If a pharmaceutical company employed your doctor, would you worry about your doctor’s complete objectivity when he or she prescribes a medication for you?

Gore Mutual supports the aggressive actions of the IBAO, and we encourage regulators to accept IBAO’s control-in-fact recommendations. The broker association has rung the alarm bell. We hope everyone is listening.

We all have difficult decisions to make. When an insurance company purchases a brokerage, other insurance companies must exit. Brokers can exert tremendous pressure on the companies that pursue broker acquisitions. Also, brokers should consider which insurers continue to do business with company-owned brokerages. Ask them to step up and show their commitment to independent brokers.

Our broker partners and the IBAO have asked for support. Gore Mutual is prepared to do our part.

Ellen Moore

President and CEO,

Chubb Insurance Company of Canada

Chubb sees three significant trends shaping the insurance landscape during 2008. First is the continued downward trend of the soft market. Second, the soft market conditions will be exacerbated by global economic pressures. Finally, we expect further consolidation of
brokers with the potential for disintermediation. The confluence of these issues will present a very challenging year for the Canadian insurance marketplace.

Within the industry, we are seeing some cracks in the profitability armor: frequency, claims costs and average payments are up sharply over prior years. The favorable loss trends we experienced due to judicial and regulatory developments are diminishing, as is the rate adequacy for the exposures we are insuring. During the last few years, underwriters around the globe have espoused they have no intention of descending to the depths of the prior soft market. We believe responsible underwriters need to continue to provide clear guidance on the balance insurers need to maintain between the goals of underwriting profit and growth. We need this both for the financial health of our business and the continued confidence of consumers that we have worked hard to earn back after the last hard market.

A number of wild cards lie ahead for the Canadian insurance business based on general economic downturns. Much anticipated, but not yet fully appreciated, is the impact of currency fluctuation and how it affects our customers’ business and risk exposures. Also, issues are emerging related to liquidity and areas of industry that might be touched by less-than-secure investments. Pricing risks and recommending coverage have been difficult enough in recent years with a strong economy and significant capacity available. Proper underwriting discipline will need masterful skill during a tougher economy.

The most critical factor for Chubb in 2008 will be the continued strength of our relationships with our broker partners. Our company strategy of client segmentation and service, as well as underwriting quality, could not be as well executed if not for the support of our distributors. We remain committed to a strong, independent broker channel. We believe the value our brokers bring to our client interaction is critical to Chubb’s success.

Despite these challenges, we look forward to a strong 2008 by doing what we do best: provide leading market products and service to our clients, and brokers that value the quality and the financial strength of its insurance partners.

Rowan Saunders

President and CEO,

Royal & SunAlliance Canada

As we move into 2008, we are seeing a greater divergence in the results of the Top 15 insurers, with some insurers that have weak strategies or execution reporting deteriorating underwriting results. This indicates not all insurers have learned the lessons of the past cycle; not all are well -positioned to respond to changing market dynamics.

When you look at these results in the context of some of the trends we are seeing in the market — such as the evolving dynamics of personal lines, a return to normalized (although not historic) claims trends and, as a result, pressure on operating expenses — it’s crucial for insurers and brokers to align themselves with the right strategic partners.

At R&SA, we are continuing to report strong financial results, with a COR of 91.2% and growth of 6.4% in the first half of 2007, which is clear evidence that our strategy is working.

Going forward, you can expect us to continue to pursue profitable growth both organically and through bolt-on acquisitions. We announced an agreement this year to acquire Canadian Northern Shield, for example, making us the sixth largest insurer in Canada and the market leader in B.C. Next year, we will continue to look for opportunities to build our businesses further. As a leading commercial and personal insurer, we will continue to build strong propositions for our brokers and their customers, focusing on our disciplined underwriting and technical expertise.

I believe market entrants and increased competition will continue to drive consolidation on both the company and broker sides. Even with this increased competition, Canadian consumers continue to favour buying their insurance policy from a broker. More than 74 % of business transacted through the intermediated channel. Strong broker relationships remain at the heart of our strategy. We will continue to support broker associations that are progressive, and we have the capital to continue to make significant investments to put our brokers on the offensive and help pull customers into their offices with innovative products, improved service, underwriting discipline and an unrelenting focus on the customer.

Colin Simpson

President and CEO,

York Fire & Casualty Insurance Company

I believe 2008 will be the year of independent brokers and the associations supporting them. The independent broker distribution network — historically in Quebec and currently in Ontario — has continued to be under attack from carriers promoting a multi-distribution platform, direct writers and company-owned brokerages. The fact of the matter remains that brokerages are becoming more aware of the corporate strategies of the markets they support within their offices — and the extent to which these multi-distribution platforms will damage their future livelihoods.

I would recommend that all independent brokers increase their focus on promoting the values of “independence, choice, advice and local presence,” as these values are associated only with their particular distribution channel. This is a powerful sales proposition, especially when positioned with the fact that they are Canadian businesses working within and supporting their own communities.

Certain insurance companies would do well to remember in the coming year not to bite the hand that feeds them! After all, the broker has ownership of the ultimate customer relationship, not the insurance company. Often this fact is either overlooked or ignored.

I applaud the 2007 successes of IBAC and IBAO, especially their positioning on the subject of broker ownership and control. Year 2008 will be no less challenging. I would encourage the respective broker associations to seek out and support an industry-wide solution for the need for brokerage financing to ease succession planning and broker perpetuation.

In the coming year, York Fire & Casualty will continue its support and promotion of the independent broker network and the Canadian property and casualty insurance companies that support them.

If I were to offer any advice to the independent broker network for 2008, it would be this: stand together and choose your markets wisely — your future livelihood depends on it!

Robin Spencer

President and CEO,

Aviva Canada Inc.

As we look ahead to 2008 for Aviva and the industry, no doubt the pace of change and competition will accelerate. Aviva will be considering many issues, some of which are outlined below.

Stability of the auto product and, as a consequence, pricing is fundamental to the sustained success of the industry and its ability to serve customers consistently. A lot of work was conducted on this issue four to five years ago, and we’ve seen some very positive outcomes in terms of customer confidence. Throughout 2008, we will need to work closely with regulators to sustain the benefits of the reforms and manage any changes very carefully.

The ongoing shift of independent brokers towards captive or tied agents is disturbing. I believe this trend is bad news for the consumer, who loses the benefit of true broker advice and choice, and for the broker channel, since the value proposition of independence begins to blur and is undermined by insurer-owned agencies.

At Aviva, we remain committed to the independent broker channel and will continue to ensure that consumers are aware of their rights when a change in ownership occurs. We intend to build on our Four Point Plan to provide independent brokers with a suite of alternatives to selling to insurers.

Increasingly, consumers want to deal with brands they recognize and trust. In the future, therefore, independen
t brokers with strong reputations and trust in their communities — in partnership with insurers that have recognized values and brands — will be the winning combination. Expect to see more from Aviva as we develop our brand to ensure that brokers and consumers understand who we are and what we stand for. We want to maintain their long-term trust.

As we travel into 2008, we must be mindful of the insurance cycle. Industry results have once again softened; we are seeing signs of higher frequency, as well as higher rates of inflation (particularly on property and accident benefit claims). Fortunately, we have benefited from very good weather in 2007, allowing positive returns. Nonetheless, if sensible rate increases happen through 2008, the pressure for higher rate increases in 2009-10, at the expense of the consumer and industry confidence, will be reduced.

Finally, we must work individually and collectively, through the IBC, to highlight the benefits of our industry to politicians, regulators and to consumers. A strong and stable industry is a prerequisite to us building long-term confidence and trust with these stakeholders.

William G. (Bill) Star

Chairman, President and CEO,

Kingsway Financial Services Inc.

The property and casualty business is entering a year of change. After two years of record underwriting profits, we are now embarking upon a few lean years.

Following 2001, the year the hard market started, we experienced four years of price increases followed by a few years of prosperity. During two years of record underwriting profits in 2005-06, rates were reduced as companies attempted to gain market share. Profits were generated in those years because premiums being earned resulted from the pricing during the hard market. But underwriting profits are declining in 2007, since earned premiums are not as high as the preceding years.

Claims costs are increasing and property values are increasing. However, insurance premiums are not increasing in the same proportion. As a result, underwriting profits will shrink in 2008. We can react and slow the trend for 2009 before we end up with several years of losses leading to steep premium increases. Politicians react to substantial price increases as an opportunity for them to make gains at the expense of the insurance industry.

It is probable that investment income will stagnate in the 4.5% to 5% level. This requires the industry to improve rates or risk having an overall loss. In past years, inadequate capital was a problem for many companies. Now it is over-capitalization. That is why many insurers have become obsessed with growth at any cost. As a result, we see the continuation of price-cutting especially in commercial lines. Since natural disasters have been minimal during the past two years, there has not been a sudden reduction of capital.

Mergers and acquisitions will be the method employed in 2008 to reduce the capital of the industry. There will be more activity in the United States, where the industry has a number of smaller companies, but do not be surprised at some large takeovers in Canada.

J.R. (Bob) Tisdale

President and

Chief Operating Officer,

Pembridge Insurance Company

The outlook for 2008 indicates that, despite ongoing rhetoric, the insurance cycle lives on. Year 2007 saw the continuation of the soft market through deep discounting of commercial risks, along with increased competition in personal lines. The most pressing challenge will be in personal lines, and will consist of whether or not regulators recognize the looming signs of change and respond appropriately.

Loss frequencies continue to rise while severity pressure increases the cost of each claim. At the same time, companies continue to be willing to forgive accidents and tickets while paying overrides to acquire competitors’ books of business. Unfortunately, it looks as though we did not learn our lesson from the last time around.

At Pembridge, our focus will be to continue to work with brokers and broker associations to support and promote independence and to help fend off direct competition by their partners. There is increasing pressure on insurers to admit that company-owned brokers are not in fact brokers — and that’s good news for consumers, brokers and the industry. The AMF in Quebec has undertaken work that should set the benchmark for levelling the playing field across Canada.

Only an independent broker can truly buy insurance on behalf of their client, by matching up premium, risk and product. All other distribution points sell insurance products directly to consumers. There is a significant difference here; based on consumer surveys, which indicate brokers are the preferred distribution method, we are beginning to see a concentrated campaign by brokers to re-establish themselves as the best distribution method for consumers.

Consolidation continues to be a major factor as insurers struggle for market share. In fact, 2008 could be the year when consolidation of significant-sized markets decreases availability of product supply.

Brokers who team up with the right partners will be rewarded when loss cost pressures and consolidation put the squeeze on market availability. Pembridge is committed to maintaining its underwriting discipline and building solid partnerships, offering a limited number of brokers a distinct competitive advantage as the market begins its next phase of the insurance cycle.