Returning to profitability

Stéphane Lespérance, president of commercial risk and health solutions at Aon Canada, gives his take on recent trends in pricing, cyber coverage and the use of artificial intelligence.

cu | Is commercial insurance in a hard market?

I would call it a market that is under correction. As many insurance companies would say, it is a market that is going back to disciplined underwriting. Return to profitability is a must. A hard market for me is as we experienced after Sept. 11, 2001, when capacity was dropping everywhere. So there was a lack of capacity, or very limited coverage. Now, capacity does exist. However, it’s not been made available. In the end, it’s still the same issue for all of our clients. It’s not easy, but it’s a different set of issues.

cu | Are you noticing new trends in pricing?

The pattern is certainly different for most of the coverages available. For most of them, we are seeing increases. The speed at which the market turned around was very fast. In the first quarter of 2019, we were seeing moderate increases or even small decreases. In a tough account to place in property lines, you would have seen increases of about 10% to 15% before the second quarter of 2019. Then, for the same account, during the second, third and fourth quarters of 2019, you were seeing increases above 30% for difficult accounts.

cu | Are some types of coverage harder to place now? If so, what are some examples?

Yes. Large complex property for sure. Other examples are professional liability for architects and engineers, and directors’ and officers’ liability. An increasing number of claims are being settled and the settlements are getting bigger and bigger. So that is definitely something on the rise.

cu | How is Aon Canada changing the way it does business?

We are becoming more of a consulting firm than a pure traditional insurance brokerage. What I mean by that is we operate solution lines in Canada and around the globe. So, our solution lines – commercial risk, health solutions, retirement and reinsurance – are all under one roof. In conducting discovery meetings with our clients, we are attaching the right solution to the clients’ needs to respond to their business requirements.

cu | Is Aon seeing a change in the proportion of revenues from fees as opposed to commissions?

For us it’s been stable, in the sense that almost half of our clients are on a fee basis. Therefore, we haven’t benefited from the lift as you would have expected. Obviously, we are capturing more premiums and capturing more commissions, no doubt about it, but it’s probably not as large of an increase as a brokerage that has 80% or 90% of their clients on a commission basis.

cu | Do Aon Canada’s brokers notice the use of artificial intelligence by insurers? An example would be software deciding whether or not to accept or reject a risk. If so, is it creating any issues?

Unless we specifically ask the question, not all insurance companies will tell us whether or not they are using AI in the underwriting process. It is not as prevalent as you would think. Most of them, I would say, are now using AI to conduct policy reviews; AI is probably more predominant within the auto or personal lines areas.

But for large commercial risks, I see it being used to review existing policies. Essentially, you compare the wording from one year to another before renewing it. The document would then be submitted to a human to conduct further review. So, it just eliminates maybe one step and makes the process easier. I don’t think we are in the mode right now that the AI takes care of everything.

From a large commercial perspective, it’s more of a tool to help facilitate the underwriter’s work. Aon is investing in that, and we’re streamlining our internal processes and automating more work to facilitate the work of our brokers. We started reviewing our operational model last year. I would say not many things are being done automatically. There is always the human element. It’s just that certain things are being more centralized; we are eliminating steps in between the various tasks.

So, you are going to see less movement of, say, a client’s file from one broker to another. We are mapping our processes differently than we have before to get efficiencies, but we still rely on the competence and expertise of our employees. Will it be different five or 10 years from now? That is a different story. But if you are asking me at this point in time, that’s the way we do it.

cu | What are some of the biggest challenges brokers face when advising clients about cyber risk?

There is one approach for large clients and a different approach for small or mid-market clients. For large, publicly-traded clients, the boards are spending a lot of time analyzing cyber risks. They’re more meticulous in mapping their risk and quantifying their risks prior to buying insurance. Then, they determine what coverages they need, what limits they need to buy, and their level of self-retention or their deductible. So, they are conducting analysis prior to buying and Aon is certainly helping them a lot with that. That’s an area where we have invested a lot in quantifying and helping our clients determine their proper limits and retentions. Instead of just trying to sell a coverage that may not respond to their needs, the coverage is adapted to fit their needs. For mid-market clients, I would say it’s been a harder sell over the past three to five years. Now it’s getting more traction, but the clients are buying coverage that is mostly off the shelf. So it’s potentially a little bit less tailored to what they would need, and that’s the trap that awaits insurers and brokers — selling something that may not respond to their clients’ needs. I think most of these entrepreneurs underestimate the importance of cyber because typically those entrepreneurs rely almost exclusively on their internal IT department, if they have one. It is recommended to have an outside consultant testing internal controls.

cu | How is Aon Canada dealing with these challenges?

Cyber issues are becoming more complex. That’s one of the reasons why we recently made the acquisition of Cytelligence, a Canadian-based cybersecurity firm that provides incident response advisory; digital forensic expertise; security consulting services; and cybersecurity training for employees. Together, these things will help organizations respond to cybersecurity threats and strengthen their security position.

The Cytelligence acquisition will help us to expand its current coverages at a time when cyber claims are almost doubling year-over-year.