Imagine yourself recovering from an illness, eating chicken soup.
Your spoon ladles out various pasta shapes. Each spoonful includes many forms of how the Canadian property and casualty insurance industry’s specialty lines may rebound from COVID-19, during the anticipated recovery of the Canadian economy.
You may see V-shaped recoveries. Some commercial lines business segments, like construction, were expected to decline because of government business lockdowns intended to prevent the spread of the SARS-CoV2 virus. Then they would rocket back up to the same shape they took before COVID.
And then there are the U-shaped recoveries. In these business segments, such as cyber, profitability plunged during COVID, and will likely stay at a valley for a time, even after COVID goes away, before there is finally a slow ascent to profitability.
And then there’s everything in between, including square root-shaped recoveries. In these lines, D&O, for example, the rebound takes a V-shape for the most part, but the ascending shape of the letter ‘V’ levels off before the recovery reaches pre-COVID levels. That could be because the level of premium will never be the same as pre-COVID, or because rising claims volumes may level off the profitability.
Overall, Canada’s P&C industry is showing signs of post-COVID recovery, as John Barclay, president and CEO of the managing general agency South Western Insurance Group, observes. As his bellwether example, he noted that syndicates of Lloyd’s of London, the fourth-largest insurance entity in Canada by premium volume, began work in 2018 on cleaning up or getting out of unprofitable lines of business.
“If you go back to when Lloyd’s started to tighten up, that work is still in progress,” Barclay told Canadian Underwriter in an interview. “I think we’re near the end of that work. That’s where you’re starting to see the flattening of rates, you’re starting to see more choice for the broker channel, and that there are some more options out there.”
Barclay’s observation bears out in most of the industry’s key performance indicators. Canada’s P&C industry made a profit of $1.93 billion in 2020, compared to $475 million pre-COVID.
The Canadian P&C industry’s return on equity (ROE) during COVID reached 10.8% in 2020, up from 7.5% in 2019, the Property and Casualty Insurance Compensation Corporation reported in the April 2021 issue of Solvency Matters. And the industry’s combined ratio (higher than 100% indicating unprofitability) was 94.9% in 2020, down from 98.3% pre-pandemic, in 2019.
But as sources told us for this story, the shape of the recovery in each P&C commercial lines specialty segment will depend on a myriad of factors, including claims patterns and how the lifting of COVID business lockdowns will affect the specific specialty business segments.
First, a reminder that what may be “standard” for some insurers and brokers may actually count as “specialty” for others. We have generally allowed those participating in the article to define for themselves what they deem to be “specialty” business segments. Generally speaking, we’ve hived off most commercial auto and property policies as “standard,” in addition to commercial general liability (CGL) policies that aren’t customized to clients’ needs.
V-Shape Recoveries: Construction
Sources may not necessarily agree on the exact V-shape of the anticipated recovery in construction lines. Be that as it may, most sources see construction as an example of the line least affected by COVID, and therefore the least likely to be affected by the end of the pandemic.
“Very interestingly, [construction] found a way to make sure that it kept its doors open [during COVID lockdowns],” said Loren Gardiner, deputy senior vice president of specialty lines at Intact Insurance. “They were able to do that due to the unique nature of it. The outside work, having different shifts, doing on-site testing, and the types of projects on which they focused — the large project construction — made it feasible to keep going. We’ve had a lot of public work projects [keep going]. Now we’ll see a lot more of the private [projects] get back up and going. I didn’t think I saw less cranes in the sky [during COVID].”
But the degree of the V-shape may be debated.
Nick Kidd, director of business insurance at the Ontario brokerage Mitchell & Whale, thinks the rising cost of building materials — the cost of basic lumber products like two by fours doubling since 2018 being a prime example — might influence the speed of the recovery in construction lines.
“I guess that’s tightening up cash flow in certain cases,” Kidd said. “So, projects that might have been planned with four or five buildings to be done in a year or 18 months are now probably spreading over a little bit longer period. That’s going to create a bit of a different challenge to some of the insurers, asking them to extend projects that maybe would not normally have been a risk for quite a long period of time.”
If anything, some insurers may actually look at capping capacity in certain construction segments that showed no signs of abating during the pandemic, said Ryan Matheson, senior vice president and national construction placement leader of Marsh Canada.
“There were effectively two shutdowns [in Ontario during the pandemic],” Matheson observed. “The first one really only affected a very small portion of the overall [construction] industry. The second one was almost non-existent, in effect. Projects were still letting people on site… We didn’t have a great number of insurers bail out of construction in 2020 and 2021. In fact, a couple of markets have sort of indicated they want to start putting some capacity back into the construction space.”
Smaller construction projects may also help to expedite recovery of the construction sector coming out of the pandemic, noted Kent Pitkin, vice president of commercial lines for Ontario and Western Canada at the MGA April Canada. He suggested a lot of Canadians are looking to small contractors to help feather their nests in the absence of being able to travel during the global pandemic.
“There were more [construction contractors] going out on their own because they could see these opportunities,” Pitkin said. “If we talk [about] contractors, these may have been guys who worked for a guy for 5-10 years, and they had the expertise to start up all these new projects. People were requesting them. A lot of people were wanting to put in a new pool, or build a rec room, or use the money that they normally would have spent on a vacation to finish their basement or upgrade their kitchen.”
U-Shaped Recoveries: Cyber
The prognosis for recovery in the cyber lines isn’t quite so optimistic.
Many see the ravages of COVID in this line as lasting much longer after the pandemic is over. This is due in part to the enormous volume of claims related to ransomware attacks, which escalated while everyone worked remotely from home during the pandemic.
In Insurance Market Report Canada: Mid-year review 2021, Aon reported that global ransomware claims escalated by 715.8% between 2019 and 2020, with ransom payments 60% higher in 2020 than what they were the year before.
New Zealand-based cyber security vendor Emisoft Ltd. estimated that confirmed ransomware incidents cost the Canadian economy between US$1.011 billion and US$4.044 billion in 2020.
In cyber liability lines, Canadian P&C insurers reported direct claims incurred of $601 million (the sum of $89 million from Canadian insurers and $512 million from foreign insurers doing business in Canada) and net claims incurred of $561 million ($66 million from Canadian insurers and $495 million from foreign insurers doing business in Canada) in 2020. But during the same year, the industry only took in direct written premiums of $221.8 million ($57.5 million from Canadian insurers and $164.3 million from foreign insurers) and net premiums written of $183 million ($25.1 million from Canadian insurers and $158 million from foreign insurers).
One broker told Canadian Underwriter of an unconfirmed, possibly apocryphal story of cyber insurers once reserving at least $350,000 for a cyber claim, and yet the average premium collected was between $2,000 to $4,000.
That’s a whopping claims ratio of more than 400% for Canadian cyber insurers, meaning they pay out more than $4 in cyber liability claims for every $1 of cyber liability premium they collect. In part, that’s because the frequency and sophistication of cyber attacks is improving, says Kent Rowe, vice president of Wedgwood Insurance Limited, based in Newfoundland and Labrador.
“There’s no discrimination anymore,” Rowe told Canadian Underwriter. “These cyber criminals used to target larger corporations. But now I liken this to what these guys do when they’re walking down a long hallway with a lot of doors. In those [one of those doors] could be the Mom-and-Pop shop across the street. That door is open. And like I said, this hallway has millions of doors, and [checking doors] is what [cybercriminals] do every day. Prevalence is a big an issue right now. And to be honest, I don’t think our industry has this figured out yet.”
There’s another reason why cyber may be slower to recover after COVID — working from home, including remote links to company servers, may be here to stay.
“Most organizations adapted very quickly [to the remote working environment], but that brought with it a whole bunch of challenges we…are continuing to see in the form of claims,” said Ruby Rai, senior vice president and national cyber practice leader at Marsh Canada. “Right now, 80% of [cyber] claims we see are because of remote working conditions.
“Even after pandemic is over, I don’t believe a lot of organizations are going to say, ‘Okay, no more remote working environment. No more selling on e-commerce websites.’ A certain number of businesses are doing a lot better because they were able to reach their customers on a wider scale than they were before. That’s never going to go back. So, I don’t think the cyber threat environment is going to go away. I don’t believe cyber claims are going to scale down anytime soon.”
Variable-Shaped Recoveries: D&O
In its special report on D&O insurance in Canada, Aon Canada reports that class actions against publicly traded entities are a big reason for the rise in costs of both premiums and claims during COVID.
Indexed premium pricing for D&O insurance is up almost double what it was two years ago, while securities class actions in Canada “have now reached a high not seen since 2011,” as Aon reports. The average settlement amount was $265.5 million in 2020, with a median settlement of $5.5 million, per Aon.
Despite this gloomy portrait, “the rate of increases has certainly not been the same extent that we saw this time last year, so there is some stabilization,” said Carolyn Oliver, managing director and national financial and professional liability placement leader of Marsh Canada. “We do believe that there’s going to be more capital coming into the market, which will obviously be favourable to those purchasing the line of coverage.
“The exception, maybe, is private company D&O, particularly in those industries that are directly impacted by COVID. I think it’s fair to say that some of the government grant or assistance programs have been very helpful to several private companies. And as those as the government starts to pull those back, the issue is how are these companies going to going to work within that new world.”
According to a Canadian Press report on July 31, 2021, the government paid out $87.1 billion through the Canada Emergency Wage Subsidy and $5.24 billion more in Canada Emergency Rent Subsidy since the programs launched.
Those subsidies have either dried up or are quickly coming to an end.
Gary Hirst, CEO of CHES Special Risks, told Canadian Underwriter the feds did an incredible job keeping privately held small business afloat during the pandemic shutdowns. At this point, the insured claims against directors and officers due to insolvencies may not be as bad as people think once the emergency funds stop flowing, he suggested.
“One hopes that the build-up of the economy takes the place of government [assistance],” Hirst said, adding that the conditions for issuing lawsuits against the boards for mismanagement or insolvency due to COVID have already passed. “For most shareholders or directors of corporations, you either know or you don’t know by now whether the corporation is viable going forward.”
Kidd thinks insurers will likely want to see solid financial results for about a year after COVID before showing a willingness to throw more capital into the D&O market. In Canada, insurers sold about $975 million ($388.6 million in direct premiums written from Canadian insurers and $586.3 million in direct premiums written from foreign insurers) in D&O insurance last year.
But will D&O insurers act sooner, knowing they can command the type of premiums they should have been charging leading into COVID?
“I think that’s exactly that,” said Russell B. Quilley of Aon, the author of Aon’s 2021 Canadian Insurance Market Report. “Do people see this as an opportunity, and do they want into the [D&O] marketplace? We were having a conversation along that line with a carrier, but they’re not going to take until next year [to make a decision]…
“I think it’s very risk-specific, still, and I think the D&O market will move slower to move out of this [pandemic]. But they were a lot slower to move in.”