Winds of Change

Pricing adequacy, interest rates, increased regulation, consumer purchasing trends and class action strategies were among several topics addressed at the National Insurance Conference of Canada (NICC) in Vancouver on Sept. 26.

Pricing Adequacy

The global property and casualty insurance industry faces an unsustainable financial future if it does not soon consider rate increases, a panel of reinsurers told NICC delegates.

Global reinsurers are conversationally discussing catastrophe price increases of between 5% and 15% for the upcoming renewal period, the panelists noted. Still, many have been slow to increase pricing in other lines, perpetuating an “unsustainable” financial path in light of a bad year for insurers generally.

“It’s a little bit perplexing as to how far the industry needs to sink in terms of its earnings or its return on equity before you start to get some sense of action around adequate pricing,” said panelist Marty Becker, president and CEO of Alterra Capital Holdings Ltd.

The panel itemized the high costs associated with earthquakes in Japan and New Zealand, storm events in the United States and the wildfire in Slave Lake, Alberta that cost the Canadian insurance industry $700 million in damages.

Becker said globally the industry started the year overcapitalized at between $80 billion and $100 billion. It has since lost $70 billion in the first nine months of the year.

Even so, he observed, there are no signs of growth or appreciable price strengthening across the private lines. “The question in my mind is: What is the compilation of conditions that finally tilts it toward change?” Becker said. “We’re not making any investment income. There’s no place to put your money today to get any kind of reasonable return. Accident year combined ratios on virtually any product line are approaching 100% or above it. We’re not earning any kind of an investor-enticing ROE. If we were, these stocks would not all be trading at 70% or 75% or 80% of book value.

“So when are we going to have the collective will to basically earn a reasonable return -not even a serious return – for our product and our product lines? Because the path we are going on is unsustainable.”

Interest Rates

Insurers can expect to see interest rates remain low for a long time, global economist Josh Feinman told NICC
delegates.

“There’s no sugar-coating it, we live in dangerous times,” said Feinman, global chief economist for DB Advisors/ Deutsche Asset Management. “The economic [issues] we face around the world are very, very challenging. It’s going to take years to repair the damage that’s been done over the last three years.”

Feinman acknowledged a low-interest-rate environment is a major concern for insurers in a “post mortgage bubble world.” But insurers should not expect to see a quick recovery of investment rates because some of the economic issues in the market today are systemic and require long-term solutions.

The sovereign debt issue in Europe, for example, currently at the heart of investors’ fears about another global economic recession, is not going to be resolved until fundamental issues can be resolved, Feinman said.

For example, core and peripheral countries in the European Union are sharing a single currency, the euro, which makes it impossible for the European countries to address their individual economic woes through independent monetary policies, Feinman said. Thus, peripheral countries in the EU can’t regulate their currency to address the fact that they are producing more than they are consuming at home, whereas core countries in the EU like Germany can’t adjust their currency to account for the fact that they are consuming more than they are producing at home.

A long-term resolution would be a closer financial integration between the EU countries, but this is a tough sell politically, because it would require some loss of sovereignty, Feinman said. In the meantime, lowering interest rates to promote economic growth remains a short-term solution for many countries.

“We cobble together a solution to resolve these strains, but it doesn’t resolve these issues in the short-term, so we get these flare-ups, these crises, on and off in these coming months and quarters,” Feinman said. “Muddling through is better than managing a system meltdown but renewed flare-ups [can be expected].”

Canada’s Regulatory Pendulum

Canada’s property and casualty insurers are concerned about the latest trajectory of the regulatory pendulum towards the path of over-regulation. “Our [regulatory] regime in Canada is among the best in the world, but I believe it is important to recognize that the regulatory pendulum is swinging, and arguably swinging too far,” said Don Forgeron, president and CEO of the Insurance Bureau of Canada (IBC).

Forgeron could not attend the Sept. 26 NICC meeting in person because he was at an international forum on insurance regulation in Seoul, South Korea. Instead, he appeared in a 20-minute video presentation shown during a luncheon at NICC. Forgeron made his remarks in the context of discussing the dangers inherent in a risk-by-risk review of capital charges.

In light of the global market meltdown in 2008, it is not surprising regulators are taking a closer look at insurers’ capital requirements, Forgeron said. “OSFI is taking steps that will substantially increase the capital that Canadian insurers must hold in order to conduct business,” he said. “And we welcome the regulator’s emphasis on better risk management and the efficient use of capital by insurers. We accept this focus.

“[But insurers’] concerns, and I share them, have always been about a Canadian risk-by- risk-by-risk review of capital charges, an approach that may end up increasing capital requirements for our industry and compels insurers to hold more capital while earning less revenue. Some critics, a few of whom are insurers, simply see this approach as a problem on the horizon….”

In support of his statements, Forgeron cited figures from reports by J.P. Morgan and Standard & Poor’s. These studies suggest European insurers facing a similar regulatory approach would need to increase their capital requirements by 30% to 50% on the conservative side, and to an upper limit of 65% to 75%. At the same time, qualifying available capital would be restricted by anywhere from 20% to 50%, Forgeron said.

Reduced capital mobility would increase the cost of holding capital. And because of the heavy capital charges applied to certain classes of investments, insurers might be forced to ship their portfolios heavily towards low-yield government bonds, Forgeron noted. This presents a new risk because of the sovereign debt issue.

Provincial Regulators and Market Conduct

Provincial regulators will likely focus on regulating market conduct of insurers, according to Doug McLean, executive director of British Columbia’s Financial Institutions Commission’s insurance department.

McLean spoke as a panelist at the NICC. The panel discussed the modernization of the international and Canadian regulatory regimes.

When asked, “What changes are likely to result to the Canadian regulatory framework as a result of international changes?” McLean noted that regulating market conduct is cited in the International Association of Insurance Supervisors [IAIS]’s core principles for the insurance market.

“We as a regulator [at FICOM] are interested in those principles dealing with market conduct,” McLean said. “In the past, this organization [IAIS] has focused on solvency, but they’ve changed their focus to include market conduct as well. “So what does that mean for us as a provincial regulator? We will probably see increased scrutiny of market conduct of insurers by provincial regulators.”

Consumer Purchasing Trends

Canadians are researching their personal insurance o
nline, but fewer are completing the transaction online, Robert Merizzi, executive vice president and chief information officer at Aviva Canada, told delegates at the NICC.

He spoke at a panel on managing business system transformation. During his presentation, Merizzi described changing consumer habits and cited results from the 2011 InsurPOLL.

“A customer actually completing a transaction online has not grown in the last four years,” Merizzi said. “Actually, during 2010-11, it started to decrease for the first time in years, which is an interesting trend.”

Merizzi said one explanation might be that customers still value the advice from their broker or tele-insurer before they go and buy their insurance.

But the power of “self-service” in personal lines cannot be denied, he added, pointing to the proliferation of mobile apps in recent years. “Ease of access to digital media is creating a much higher price sensitivity in the marketplace,” he said. “The trend toward ‘self-servicing’ is happening faster and faster.”

Certifying Class Action Lawsuits

Certification of class action lawsuits is on the rise, raising tactical questions about whether defendant insurers should even bother fighting certification, or keep their powder dry and fight the good fight at the trial.

Laura Cooper, partner at Fasken Martineau, discussed class action statistics and legal strategies at the NICC.

“With respect to class actions generally, I’m sorry to say the news isn’t great,” Cooper said. “Certification of class actions is definitely on the upswing. In the past year, in Ontario, where I primarily practice, out of 24 certification motions that were contested, 20 of them were certified. That was a change from the previous record of some 60% certification.”

Cooper said, the costs to fight class actions are increasing, because defendant insurers are trying harder and harder to defeat class certification or at least narrow its scope.

Strategically, Cooper said there aren’t many opportunities for defendant insurers to accept certification and just
go ahead and fight at trial. “As I say, that’s not going to happen very often, but you should always think about it,” she said.