Primary Insurer Strategies 2005: Cycle Management

The past year brought in significant regulative changes to the Canadian property and casualty insurance industry, observe company CEOs in CU’s “primary insurer strategies 2005” review. While insurers are still trying to assess the full impact of the provincial auto insurance reforms introduced, all agree that the year past produced meaningful reduction in claims costs while rate adjustments made the year prior continue to deliver double-digit premium growth – all of which will likely translate 2004 into a “banner year” in terms of bottom-line profitability.

But, the party may soon be over just as the industry was getting warmed up, the CEOs warn. There is almost an “even split” between those CEOs participating in this year’s review with regard to what the marketplace will likely experience next year: some see the industry slipping into its “bad habit” of pricing competition while others hope for a “soft landing” after what all agree is the end of the so-called “hard market”. Regardless of pricing competition, the CEOs expect that claims costs – in terms of frequency and value – will rise during 2005, thus casting a shadow on the true effectiveness of the auto insurance product reforms brought in across the provinces. In this regard, Ontario auto remains a critical market to watch in terms of cost trends, the CEOs say, while the regulative environment now affecting auto in Alberta leaves many insurers doubtful of achieving any real cost savings.

The year ahead will probably see increased competition among insurers, the CEOs predict, with consolidation in company and broker ranks likely to occur. Next year will also present a new challenge in repairing consumer confidence in the industry, which will be further complicated by the negative publicity surrounding the Spitzer investigation into broker remuneration arrangements, they observe. Against this fraught background, insurers will be walking a tightrope in maintaining their market positions as well as delivering the necessary shareholder returns to keep capital in the industry. In short, the year ahead will be about the battle of “effective cycle management”, the insurer CEOs say.

Michael Donoghue, president of Allstate Insurance Co. Canada

2004 has been good year for the insurance industry. Companies are enjoying a measure of stability and success and are not afraid to look at the bottom-line. When companies enjoy a measure of stability and success they are able to pass that along to consumers. Rates are coming down across the country, and indications suggest that this trend will continue in 2005.

As we look to 2005 and beyond, two things should be top of mind, “consumers” and “complacency”. Two years of success do not erase a decade of instability and uncertainty. Now is not the time to sit back and be complacent. Now is the time to be even more vigilant in our commitment to consumers to provide a high-quality product at the most affordable price.

Our company has worked extremely hard to earn the trust and confidence of our customers. Unfortunately, we know that our general image does not reflect that hard work. As an industry, we need to be doing more to restore consumer confidence in the industry. We need to break down the long-standing barriers that have impeded consumers’ understanding and trust. For example, we can speak with a common voice on issues that impact consumers. We can be more accessible to consumers by listening or responding to concerns, or by providing a simple explanation about a product or service. We can be more transparent in how we conduct business.

We should be doing more to educate and communicate in plain language to all Canadians about the products and services we offer and the value that stability in the marketplace provides to consumers. Over the past year, the insurance industry has undergone significant changes across Canada. As governments continue to fine tune the new reforms, it will be important to reach out to decision-makers and regulators to provide insight and recommendations. Just as governments continue to fine tune, so too should the industry. At Allstate, we will be looking to see what more can be done for consumers.

We will also be on the look-out for what lurks around the corner. The industry cannot afford to fall into the same traps that it has in the past. Now is the time to be pro-active and mitigate issues in a constructive and positive manner. I am optimistic that 2005 will be the springboard for even more prosperity, growth and stability for our employees, agents, brokers and business partners. To do so we must work hard to meet and fulfill the expectations of consumers, and we must not become complacent.

Igal Mayer, president of Aviva Canada Inc.

All of us in the insurance industry have worked diligently over the past 12 months to deliver on our promises, demystify our product and process, and stabilize the price and availability of our offerings. Together, we have made excellent progress.

Auto insurance reform is working across Canada. Auto product rates are renewing at 10% less on average then a year ago, and Facility Association (FA) is depopulating, notably in the Atlantic provinces as well as in Ontario where there are half as many drivers in the FA than a year ago.

We were also there when our policyholders needed us. I am very proud of Aviva and Pilot employees’ response in Peterborough, Ontario. Our catastrophe team was on the ground within hours of the major rainstorms that devastated the community in July. In this situation like so many others, we delivered on our promise, and more. And, yes, the industry is financially much healthier this year than last, making strong profits and good returns.

While any notion of profits in the millions or even billions is spun by the media as “gouging” and “obscene”, it is all a matter of perspective. The industry’s profit from 1999 to 2003 equated to less than five cents for every dollar of premium collected. Even if you take and improved 2004 performance, this five-year average equates to approximately six cents of profit for every dollar of premium collected. I feel this is hardly excessive for the value we provide to 32 million Canadians from coast-to-coast.

In 2005, our good work must continue. Aviva fully supports the Insurance Bureau of Canada’s (IBC) strategy to restore consumer confidence by conducting meaningful research and promote the ways our industry improves life in our communities. I strongly believe we, as an industry, must keep our focus on consumer education: we must demystify our offerings, enhance transparency about our practices and processes, and show our industry pride.

On the business front, Aviva will continue to seek innovative ways to expand marketshare and strength in Canada. We will not, and we can not, expect rate increases to solely drive revenue growth. Aviva’s future success lies in its value proposition. For us, this includes a strong focus on claims care, and on introducing business solutions for our brokers. It also means seeking ways to offer increased choice for insurance consumers.

Aviva employees have worked hard over the past number of years to introduce progressive tools that make working with us easier. In 2004, our broker partners began to see the rewards of this investment, and in 2005 you can expect more of the same. Aviva will continue to keep ahead of the demands of the market, and deliver products and services consumers will value, by actively listening to our stakeholders. I look forward to the ongoing feedback of our broker partners, and to another year of shared progress and success.

Jean-Franois Blais, president of AXA Canada

Before discussing the future, we need to look back to the events that have marked our industry in the last few years – particularly at the difference between our situation in 2002 and in 2004. For the property and casualty insurance industry, the difference is clear – we have gone from our worst ever year in terms of profitability to our best.

Also worth noting are the many developments the industry had to confront during this
period. At the political level, we saw elections in several provinces, pressure from consumers, and various bills to reform automobile insurance. There were also availability issues and a series of rate hikes, which favored the growth of the FA, a new capital test and rating downgrades. And to that we should add the natural disasters and the recent Spitzer case, which has shaken the industry.

What would consumers like to see? They want an accessible marketplace and affordable products. They also want stable pricing. As an industry, we are not always able to satisfy this requirement because overall pricing is influenced by many factors, the most important being claims inflation. That is our “Achilles’ heel”. Auto insurance reforms have been very effective at reducing claims frequency in the short run. But we do not know what the frequency will be a few years down the road. And, more importantly, the auto insurance reforms have not dealt with claims inflation as well as they should have.

If I were to make a wish, it would be this: that the insurance industry would immediately begin focusing on reforms for the coming years in order to avoid another crisis. The insurance industry also has an important role to play in demystifying insurance – a very complex and abstract concept for consumers in terms of products as well as pricing. We must educate consumers, the media and political decision-makers about insurance, one of life’s essentials for just about everyone. That is how we will retain consumers’ trust, especially in light of recent events like the Spitzer case.

In short, we have the capital, the expertise and a much better knowledge of consumers’ needs. 2005 should be a good year for all insurance clients. Now is the time for the insurance industry to mobilize. We have a window of opportunity. It is up to us to ensure that our industry’s value is recognized.

At AXA, we have what it takes to increase appreciation of our industry. Our best tools for doing so are our employees, who are experts in our business, financial protection. We also have our brokers, with whom we have built a relationship of trust and a rock solid partnership. Lastly, we are fortunate in being able to count on AXA’s globe-spanning size and strength. With so many trumps in our hand, we look forward to the challenges of tomorrow with confidence.

Charles Lawrence, chief agent of CNA Canada

It is remarkable that less than one year ago the mantra of insurers, brokers and insureds was “just give us market stability”. How soon we forget. We now find ourselves heading back down the slippery slope of declining rates and the inevitable return to single digit returns…and so the roller-coaster ride continues. Who do we blame this time?

We cannot point the finger at the insurance companies. Listen to every president, CEO and senior executive, all who claim that their company is not guilty, they are committed to underwriting profit. The reality is some of us have already succumbed to market pressure. Underwriters “in the field” are being directed to maintain high underwriting standards but some of us in senior management are not demonstrating the courage or will to support their efforts. Whoever said we learn from history must have never worked in the p&c insurance industry. It cannot be brokers. Every broker suggests declining rates are not good for the industry. This seems obvious – why would brokers want to continue the historical instability of the market, what would be the motivation?

Can we blame our insureds? They are the only ones left! How can an industry which provides such an important and often critical service to our economy fail to communicate this? Other service industries consistently publish profits and double-digit returns on equity (ROEs) yet the p&c insurance industry is criticized for even suggesting profitability which results in increased shareholder value.

The industry and associated regulators are now addressing the importance of communication with our insureds. This is a great beginning, we are a public service industry but we can only respond to tragic events if the industry is, in itself, stable and prosperous. We need to refocus our attention and return to the 2003/2004 uniform strategy of underwriting for profit. We need to deliver to insureds the message of the benefits to them of a healthy and profitable insurance sector. Finally, we need to deliver on the promise of stability in the market, this is the only way we will achieve sustained profitability and growth.

Bill Star, president of Kingsway General Insurance Co.

2005 will be a turbulent year for the insurance industry. Many of the concerns about the industry brought up by Spitzer will be echoed by insurance commissioners throughout the U.S. and Canada, and each one will try to gain as much publicity as they can to help their political future.

2004 was one of the better years for the insurance industry. We saw substantial premium growth and premium increases in all sectors. The return on equity was brought to higher levels than we had seen in many years. That brought criticism of the industry in Ontario, where premiums for automobile insurance have been increasing. The industry did not get across the point that insurers lost money on auto in Ontario, but had profits in other areas. This type of criticism will continue into 2005 and will get worse when higher premiums are required to continue a healthy market for auto insurance.

In Alberta, we will continue to see more problems arising from the changes made in 2004. Now that the election is over we may see a more logical approach to auto insurance, particularly as market conditions will deteriorate and there will be a shortage of market availability. After all, if the majority of underrated business is placed in the FA, the losses in Facility will be enormous and there will not be a good distribution system available to spread the loss among the number of insurers remaining in the province.

Since many inexperienced drivers will be able to afford auto insurance, now that the rates for that category are inadequate, accident frequency and the death toll will rise in Alberta. Good drivers will eventually pay higher premiums. Property insurance rates will increase in Alberta due to the unusual weather related problems being experienced worldwide.

Ontario auto will continue to show improved results in the early part of the year and then deteriorate as the year progresses. The better results experienced in 2004, and expected for early 2005, are still a result of premiums being earned at higher levels due to rates charged prior to the freeze. Lower premiums due to rate reductions, as well as lawyers and clinics finding new ways to build claims, will cause the experience to have a dramatic turnaround leading to combined ratios in excess of 100%. Overall, the year ahead will be a difficult one for the industry with many problems arising out of the political grandstanding that we will see throughout Canada and the U.S.

Nicholas Smith, attorney in fact in Canada for Lloyd’s Underwriters

I start my attempt to peer through the mists of future time from a somewhat higher vantage point than in the past since 2004 saw a dramatic increase in Lloyd’s Underwriters’ business in Canada. Gross direct premiums signed for the first nine months grew 30% year-on-year led by substantial growth in the commercial property and liability classes that form the bulk of Lloyd’s income – a situation that is particularly notable as it came in a year when the market’s global capacity was essentially flat.

Based on this experience, the portents for 2005 are good. From my recent discussions with underwriters and brokers, it is clear that sentiment in Lloyd’s towards Canada has improved, and that more Canadian business is being seen in London. One particular area where Lloyd’s has experienced increased demand is terrorism.

Much of the increased interest of Lloyd’s underwriters in Canada has been spurred by attractive pricing conditions. Any optimism for 2005 must therefore be tinged with caution: if market rates drop below u
nderwriters’ strict pricing thresholds, they have warned that they will be prepared to turn business away, and a number of Lloyd’s businesses have indicated that they may decrease their total capacity in 2005 amidst concerns about pricing levels in the international markets.

John Chambers, active property underwriter of Aegis Energy Syndicate, a significant writer in Canada, told me that his sense is that smaller commercial risks are likely to be renewed “as before” after three years of rate correction. Larger commercial property accounts are also showing signs of increased competition which is likely to continue, he adds. However, he also predicts that some underwriters expect to see modest rises, especially on the liability sections of package policies, but warns that these are uncertain forecasts, and much will depend on the knock-on effects of this year’s catastrophic hurricane season on the wider global insurance and reinsurance markets.

In addition, Chambers stresses that, if we are to have a strong and secure insurance industry, it is essential that we make a reasonable underwriting profit in our modern era of limited investment returns. This view underscores the resounding “No” given by our chairman, Lord Levene, in his spring address titled “Is Profitability a Dirty Word In Insurance”, which was made to the Empire Club in Toronto. Remembering that it is not, and getting that message across in the face of media, public and political cynicism, will be a task for Lloyd’s as much as anyone else in the industry in 2005.

Rowan Saunders, president of Royal & SunAlliance Canada

After years of a market environment with a “boom to bust” cycle, which frustrated both consumers and shareholders, 2005 will be the year where we achieve equilibrium for all stakeholders. I believe that the key challenge in 2005 will be effective cycle management. I hold an optimistic outlook and anticipate a “soft landing” as we transition from a hard market. Industry earnings peaked in 2004, but we will produce an underwriting profit and an acceptable ROE in 2005.

Market dynamics will include a movement to greater consolidation in both the brokerage and insurance companies, as they focus on longer term growth. Investments yields will improve moderately in 2005 as interest rates begin to rise. Factors such as anticipated investment yields, capital levels and recent memory of the lessons learnt from the past hard market, will lead to more disciplined underwriting and a narrowing of class appetites. We will see rate trends converge with loss cost trends.

We will see some stability as insurers, brokers and regulators adjust to product reform and more refined pricing methodologies used. Commercial property rates have flattened. As companies move to a better understanding of the technical price, there will be some rate decreases in certain segments. There is still a need to increase prices in commercial liability, but at a far less dramatic rate than in previous years.

At Royal & SunAlliance, we believe that technology will play a key role in 2005. We must leverage strong technical platforms in order to succeed. In commercial lines, technology will be used to put skill, knowledge and authority into the hands of front-line underwriters. In personal lines, technology will be used to further the efficiencies already gained and to lower the ultimate cost to the consumer.

Restoring confidence with consumers will continue to be a major issue for the industry. In the wake of the commission controversy, consumers will receive greater transparency and disclosure from insurers and brokers. I believe this will go a long way to improving our industry’s image. We must continue to focus on earning the public’s trust. After an exceptionally successful 2004, Royal & SunAlliance has an optimistic outlook for 2005. We look forward to working with our broker partners to address the challenges ahead and responsibly grow our business.

Robert Cooke, senior vice president of State Farm Insurance Co.

As the year draws to a close, 2004 has been a year of marked contrast from 2003 for our industry. The political storms of 2003 started to abate leading to positive auto insurance reform steps in New Brunswick and Ontario. The recent legislative reforms in New Brunswick and Ontario are producing the desired price stability we had hoped to achieve. If trends continue, consumers will likely benefit from increased competition and can look to further rate relief over the next year. These trends are great news for consumers.

The legislative environment in other areas, most notably Alberta, remains less certain. We are more cautious about the impact of the current reform effort in Alberta and we will need more experience with the newly implemented “grid system” and product changes to see if the plan has the capacity to achieve price adequacy and greater availability in the long-term. No company can survive for long when the price is not sufficient to cover the cost of doing business. Instituting “take-all-comers” regulations is a placebo. It feels good early on, but does nothing to solve the underlying illness. The headache always comes back. Meaningful product reform and ability to match risk to premium is the only sustainable remedy to a healthy insurance environment. I am hopeful we can remain engaged with the re-elected Alberta government to bring a successful conclusion to the regulatory reform process – one that truly benefits all consumers and maintains a healthy and competitive marketplace in the province.

With a return to an improved level of profitability industry-wide, continued success depends on insurers’ resolve to maintain proper discipline on their bottom-line results. There is little doubt consumers are watching closely. The media continues to focus on various aspects of our industry – profit, pricing, market conduct, and intermediary compensation. These issues will keep us firmly in the public eye in the year ahead. I believe 2005 will present some interesting challenges as our industry looks to restore the goodwill and confidence that has been lost in the past two years.

I know State Farm agents and employees are proud of the exceptional turnaround we have achieved in the past year, and we look forward to 2005 with optimism. As State Farm looks forward to breaking ground on a new Canadian home-office in the year ahead, 2005 will represent a year of renewed excitement, growth, and commitment to our position in the Canadian marketplace.

Gregg Hanson, president of The Wawanesa Mutual Insurance Co.

It has certainly been a frantic year of activity in the p&c insurance sector. In Alberta, New Brunswick, Nova Scotia and Newfoundland, the sights of media, consumers, politicians and regulators have been squarely aimed at the automobile insurance sector. Ontario was taking a more deliberate and measured approach which was fortunate given the size of that market. Just as we thought the “perfect storm” of regulation and legislation was somewhat subsiding, Eliot Spitzer’s findings and accusations blasted the entire insurance sector back into the headlines. It has become evident that media reporting has major power in catapulting any industry into “hero” or “zero” status.

We have seen two years of significantly improving profitability which was welcome after several years of serious decline. However, 2005 is very likely to see a reversal of this trend. With rollbacks, rebates and freezes on auto insurance rates over the past 12-18 months, underwriting profits will wane, in spite of actions of various provinces to control the cost of claims. Also, the phenomenon of recent reductions in claims frequency is not expected to continue. At the same time, investment income cannot be relied upon to be beyond single-digit return rates. Even with the absence of any significant catastrophe activity in 2005, premium volume growth will be moderate at best and ROE will be lower.

Wawanesa is very well positioned in the p&c insurance marketplace. We are planning for steady, albeit lower, growth rates. And, as a mutual company, we are satisfied with lower pr
ofit levels. Our financial position continues to strengthen which allows us to take a longer term and more temperate view of the market. This, in addition to the fact that we are “A+” rated by A.M. Best, should provide confidence and comfort to our broker partners and policyholders. While other companies may be focused on marketshare and industry consolidation, we are satisfied to grow one customer at a time based on our track record. We welcome broad competition from many companies to keep the selection of products for brokers and consumers plentiful.