Success of start-up Canadian P&C companies influenced by senior managerial experience: PACICC report

When it comes to the success of new entrants into the Canadian property and casualty insurance market, managerial experience matters, according to a new report by the Property and Casualty Insurance Compensation Corporation (PACICC).
The report, Determinants of survivability of new entrants to the P&C industry, is the fifth in PACICC’s ‘Why insurers fail’ series. The mandate of PACICC is to protect eligible policyholders from financial loss if a member insurer becomes insolvent.
“New entrants nearly always ‘bite off’ more than they can ‘chew,’ based on their initial capitalization,” the report says. “However, there appear to be two important factors influencing whether a new entrant survived through the first decade, or exited involuntarily.
“First, the experience and quality of management appears to be important in risk decision making and establishing effective operational processes.
“Also important was the availability of external support: in terms of managerial experience/capacity, data/statistical services and access to capital to support growth and adverse [claims] development.”
In its report, PACICC notes 230 new insurance companies received federal and provincial licenses to operate in Canada over the past 30 years.
About 22% of these companies can be defined as ‘start up’ companies, meaning they did not have a financial institution as a parent company. These types of insurers tended to be entrepreneurial in how they originated, characterized by a small number of shareholders and limited access to external sources of capital.
Twelve per cent of the 283 company exits from the Canadian P&C marketplace between 1980 and 2010 resulted from insolvency. Among these “distressed” insurers, two-thirds were start-up companies.
PACICC’s report identifies some common characteristics among failed start-up companies. One is that the average experience level of senior managers at start-ups that exited the market involuntarily is “less than half the experience level of senior managers of other new entrants,” the report says. “In addition, these less seasoned managers had, on average, not experienced a full insurance cycle as a senior manager of a P&C insurance company.”
On average, senior managers of start-up companies that became insolvent had about six years of experience in a senior officer position in the industry. The average for market entrants is nine years.
In contrast, managers who entered the market through a strategic restructuring (i.e. the amalgamation of existing insurers) had an average of 16 years of experience prior to entering the market.
“Experience matters,” said Darrell Leadbetter, author of the report, at PACICC’s annual general meeting held in Toronto on Apr. 27.
Operational processes and market strategies also mattered, the report found.
For example, new entrants exiting the market involuntarily “on average invested less in data and statistical services compared to other new entrants, handicapping their ability to adequately price policies and monitor claims development.”
In addition, new entrants following a more aggressive market entry strategy – increased commissions to brokers and under-pricing policies – increased their chances of failing before the 10-year mark, This dynamic was exacerbated by the fact that about 70% of distressed insurers in the study “provided no additional capitalization after the initial start-up.”