The Fantasy of ‘Market Discipline’

What will it take for Canada’s property and casualty insurance industry to get out of the current soft cycle, characterized by lower premium pricing and an expansion of available coverage terms?

A $150-billion catastrophic event? A less competitive market? A bankruptcy or two?

Alas, maybe the most important factors in breaking the current market cycle are things Canadian P&C insurers aren’t demonstrating much of right now (particularly in commercial lines).

Willpower and discipline.

To be fair, in a marketplace structured around competing for policyholders, it is simply too difficult for companies to appear “above the fray.” It is too difficult to give up whatever business exists out there on a point of principle.

For example, when a commercial broker tells an insurance company that a client is about to shift its account because they have found the equivalent coverage elsewhere for 30% cheaper, what is the carrier’s first competitive instinct? To walk away?

No. The carrier will offer 32% off and maybe even throw in some freebie coverage terms or two. After all, what’s the point of being in business if you can’t keep the business?

Oh sure, CEOs are conditioned to say otherwise. When the media microphones are on, company executives talk about the importance of maintaining pricing discipline. They are fully aware the product should be priced appropriately and correctly, so that the insurer doesn’t take a bath when a claim comes in.

And yet. And yet…

Company CEOs have opened the year noting Canada is currently about halfway through what is predicted to be a decade-long soft market. For about four straight years, the industry as a whole has taken an underwriting loss, some of the damage being hidden by reserve releases for prior-year claims.

Companies are writing the same amount of – or more – commercial premium, and yet their profit margins are shrinking. How could this possibly be, if the product is being priced properly?

CEOs are not blind to reality. They are aware of market cycles. They know years of soft-market pricing will ultimately come back to bite them. So why do these unsustainable rates continue?

Because no company can afford to exercise the kind of willpower required to break a soft cycle. Walking away from business is counterintuitive in a competitive marketplace. To break the cycle would effectively be saying: ‘I am willing to take a loss,’ or ‘I don’t mind watching my premium base shrink and seeing my competitor’s expand,’ all to prove the point that pricing must be correct, not slashed.

And so we continue to work our way through a soft cycle in commercial lines, which makes no sense to any of the players who know better, and yet everyone feels trapped within the cycle nonetheless. From a distance, it is almost like watching an addict talk about how they feel trapped inside the behaviours that are making them ill. How often do we hear the plaintive cry of an addict: ‘I can’t help it,’ or ‘I know I shouldn’t be doing this, but I can’t seem to stop myself.’

Even some of the smartest executives are prone to take a passive approach to the soft market cycle. The way they speak, it is as if they feel the cycle is controlling them, and not the other way around. “We know we have to maintain pricing discipline,” they say to anyone who will listen, as if chanting the mantra to themselves will make it so. “The cycle made me do it.”

Perhaps it is time for Canadian insurers to remember that the first step in a 12-step program is to recognize powerlessness in the face of an addiction. If this doesn’t happen, an intervention from a higher power may be required. Would the behaviour stop, knowing that regulatory intervention may be the ultimate – and unwanted – outcome of soft market pricing?

Yet another step towards recovery is for addicts to make amends to others for the damage their behaviours have caused. In this context, insurers would be doing their clients a service by holding the line on pricing now, so that they don’t have to explain seemingly arbitrary rate increases to their clients further down the road.

It’s time for companies to acknowledge their behaviours are causing this soft market in commercial lines, not the other way around.