Staging an Intervention

As difficult as this may be for brokers to hear, market swings in the competitive environment of the P&C insurance industry are inevitable.

During soft markets, when capacity is plentiful, companies will use that capacity to lower premium rates to gain market share. They make up for any underwriting losses through investment returns.

Everyone in the business talks about “the importance of underwriting discipline.” But let’s be honest: In a soft market, you could find yourself out of business for pricing risk correctly; especially when all of your competitors have thrown pricing discipline out the window.

Now the proverbial chickens have come home to roost. Insurers’ claims costs have exceeded premium revenue in certain commercial lines, and terrible investment returns are unable to make up for the inadequate pricing. To return to profitability, insurers have to charge consumers more and offer less.

Consumers are not happy. Increasingly unable to find low commercial insurance rates for certain Canadian businesses, brokers are telling insurers, ‘Name your price.’ And now brokers are going back to their clients and saying something along the lines of, ‘Look, we know your insurance was $20,000 last year, but this year it’s going to be $60,000.”

Is the industry incapable of preventing these kinds of hard market cycles, thus requiring public intervention?

It seems clear that regulators will not step in without pressure from the politicians. Oh sure, solvency regulators generally frown upon rate-slashing. They don’t like it because it reduces insurers’ capacity, which the regulators feel should be reserved for claims payments. But are regulators truly in a position to complain about lower rates for consumers?

Unfortunately, when politicians intervene, the knee-jerk reaction is to cap or reduce pricing artificially at the expense of private insurers’ bottom lines. That only makes unprofitable business even more unprofitable, which makes hard markets worse (and longer) for everyone.

No, if governments feel compelled to intervene, they should consider more “financial backstop” arrangements in partnership with the industry. In other words, the government sets aside a pot of money for the general category of hard-to-place risks (e.g. condo, trucking, taxis, overland flood, or snowplow insurance). This way, even if pricing in the private market skyrockets, such unprofitable risks can still find some form of insurance protection.