Guarantee CEO shares theories on decline of foreign P&C carriers in Canada

Domestic insurance carriers have nearly doubled their combined share of the Canadian property and casualty market in the quarter-century Alister Campbell has been in the industry, and on Thursday he offered some theories as to why.

Campbell, CEO of The Guarantee Company of North America, was the luncheon keynote speaker at the CIP Society Symposium 2013, held at the Toronto Region Board of Trade office by the Insurance Institute.

When he started his insurance career in 1985, Canadian-based carriers had about 33% of the Canadian P&C market, Campbell suggested, adding today, their combined share has risen to nearly two-thirds.

Alluding to an increase in cross-border trade and the decline in manufacturing in Ontario, Campbell suggested, the trend in Canadian P&C is “exactly the opposite” of what is happening with other financial services and in other industries.

Another factor is Ontario’s auto regulations.

“I suspect Queen’s Park has something to do with this,” Campbell said of the decline of foreign carriers’ market share. “Ontario auto is one of the things that insurance people know about Canada when they think of Canada. They know its breathtaking lack of profitability.”

Campbell did not go into specifics on Ontario auto financial performance in his presentation but the Insurance Bureau of Canada in February told Canadian Underwriter that the carriers lost an average combined total of about $1 billion a year from 2008 through 2010 on Ontario auto, and the total industry-wide loss in 2010 was $1.7 billion. Out of $10.3 billion in premiums written in Ontario auto in 2011, IBC said at the time, the profit was $233.2 million.

But still, Campbell noted Thursday, the minority ruling Liberals and the New Democratic Party are “contemplating arbitrary mandated price cuts in an industry that’s in a free market and is already losing money.”

Campbell was referring to the NDP’s demand for a 15% cut to auto premiums. The Liberals have emphasized the need to reduce fraud but last month the ruling party did support an NDP motion in favour of a 15% price cut.

The Liberals have emphasized the need to get to the root cause of higher claims costs in the province, promising to implement the recommendations of the Auto Insurance Anti-Fraud Task Force. These include giving the Financial Services Commission of Ontario (FSCO) the power to regulate health clinics and treat and assess vehicle collision injuries, a province-wide licensing scheme for the towing industry and having carriers collect information about towing expenses so they can analyze relationships between tow operators, collision repair facilities and clinics.

Still, the financial performance of Ontario auto makes it “very hard to make the case” for a foreign carrier to enter personal lines market in Canada, Campbell suggested.

Another possible explanation for the decline in foreign carriers’ market share is the capital requirements mandated by the federal Office of the Superintendent of Financial Institutions (OSFI), Campbell said, referring to metrics such as the minimum capital test and branch adequacy of assets test.

Carriers need “a lot of capital” to operate in Canada compared to other Western nations, he said, describing OSFI as a “breathtakingly conservative” financial regulator. The strict capital requirements in Canadian financial services was “part of what made all Canadians proud” a few years ago, Campbell said, noting Canadian financial institutions did not need to be bailed out.

He was alluding to the financial crisis in late 2008, when the Federal Reserve Bank of New York was authorized to provide up to $85 billion in bailout funds for American International Group Inc. and the American government invested $45 billion in Citigroup Inc. under the Troubled Asset Relief Program.

The more recent troubles in Greece, Cyprus and other European jurisdiction could also be a factor in the decline of foreign carriers’ Canadian P&C market share, Campbell suggested Thursday. “It’s been extremely difficult to be a global financial institution,” he said, noting interest rates continue to decline.

“This could go on for longer,” he added, suggesting low rates have made business especially difficult for those writing life insurance. “It could eat European carriers alive.”

While Britain has seen a “dramatic rise” of direct writers and aggregators, Campbell suggested the brokerage industry in Canada is still doing relatively well.“There is no jurisdiction in the Western developed world where the broker has been as robust.”