Canadian Underwriter

If recession hits, which specialty lines will create problems for brokers?

September 1, 2022   by David Gambrill

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Consumers respond predictably to a flagging economy – they cut back on spending. While Canada posted 3.3% annualized gross domestic product (GDP) growth in 2022 Q2, that number lagged analysts’ 4.4% forecast, and July’s real GDP number inched down 0.1%.

Which means economists’ longstanding recession predictions are creeping closer to reality. Should Canada’s economy slip, specialty lines linked to consumer discretionary spending will become vulnerable, said Chris Mutcheson, partner and national leader of brokerage Purves Redmond Ltd.’s FINEX-Financial & Executive specialty products unit.

“The tourism industry got absolutely crushed [during the pandemic],” he said. “We thought tourism [after the pandemic] would help open up the airlines, the hotels, the bed and breakfasts, everything to do with restaurants and the service industry. But we’re about to go into a recession…so, we’re almost facing the same scenario but different factors of how we got there.”

Meanwhile, reports from Canada’s major banks show weakening of housing markets due to a combination of uncertain job outlooks and higher interest rates. A recent RBC housing report called for home resales to fall nearly 23% this year and 15% next year.

That’s significant since real estate cycles are bellwethers for consumer spending confidence, which in turn can affect the fortunes of various commercial industries that purchase insurance based on revenues, observed Tyler Averill, senior vice president of national sales at Gallagher Canada.

“The housing market is probably a good leading indicator…and if it’s pulling back, that’s probably a leading indicator of other markets that will follow suit,” he said.

“I don’t know if companies will pull back their [insurance] spends directly. I don’t know if they’re going to reduce the amount of coverage they have or will necessarily want to reduce the limits they have. But I think our job as brokers is going to be staying ahead of [any] changing business needs.”

And don’t expect cyber to bounce back anytime soon either.

For Averill, the conundrum is that more businesses are now interested in buying the cyber product because they better understand its value. At the same time, the hard cyber market makes it difficult to afford.

That increased cost is causing some company boards to consider self-insuring, said Marc Major, industry and specialty placement leader at Marsh Canada.

“The cyber line in specialty is increasingly being challenged,” he said, “almost to the point where the question on most boards’ desks these days is, ‘Do we even bother buying this? What are we actually buying at the end of the day if it doesn’t protect the risk we’re most concerned about?’”

Mutcheson believes the cyber product is fundamentally broken, in part, because cyber insurers are covering both first-party and third-party costs of companies subject to ransomware attacks.

First-party costs are those incurred by the company’s to recover from an attack — like restoring IT systems, hiring PR experts to restore the company’s reputation, legal costs, and regulatory actions and compliance. Third-party costs relate to defending lawsuits by third parties that were affected by a company’s down time.

Some brokers said cyber lines could break down into sub-specialties — one for first-party costs, for example, and another exclusively handling third-party liability.

“When it comes to ransomware, that’s obviously a first-party exposure where you’re ponying up X millions of dollars to protect your infrastructure and your balance sheet,” said Major. “I don’t think the insurance market currently is specialized enough to understand that exposure.”

With COVID-19 sparking staffing crises at hospitals and long-term care homes, and causing shutdowns of emergency rooms across Canada, several brokers see a recession adversely affecting health professional liability lines and capacity for long-term care coverage.

But the insurance market in long-term care is showing signs of softening, with some capacity returning to the market following the pandemic, said Mona Krolak, senior vice president of HUB International HKMB Ltd. She attributes the market improvement partly to a carry-over of hospital infection-control policies into long-term care facilities.

Insurance company underwriters are now looking to see if those control procedures are being followed in long-term care settings, she said. They will ask if there are enough staff members to care for the people there, and about what risk-management protocols are in place to prevent COVID-19 spread.

“I always say to underwriters, ‘You have a much better risk today than you had two years ago, even with the lifting of [pandemic] restrictions,’” said Krolak. “As long as homes are run right, and they’re following all the procedures and protocols that have been put in place over the past two years, I think that will reflect in [reduced] loss ratios.”


This article is excerpted from one that appeared in the August-September issue of Canadian Underwriter and includes files from Alyssa DiSabatino. Feature image by