What effect will investor pressure have on the insurance industry?

Demands are being placed on the insurance industry and that could set up some tense moments with a couple of groups, suggested the head of Zurich Canada.

Demand from insurers, investors and shareholders are significant challenges to the industry as a result of the COVID-19 pandemic, noted Saad Mered, Zurich Canada’s CEO and chief agent, during Canadian Underwriter’s recent webinar, COVID-19 and the Economy: The Impact of a Recession on the Canadian P&C Industry.

“I think some of us old enough remember reinsurers from the 2001, 2002, 2003 period, and we’re starting to see similar, hard-fought negotiations and discussions on treaty renewals,” he said when asked to assess who might be winners and losers during these times. “That’s telling [because] shareholders and investors in the insurance and reinsurance industry, so far, are not diminishing their expectations on return on equity and return on capital.”

The insurance industry, he added, has to be more perceptive in the sense that they’re being compared to other industries when it comes to such expectations. The banking industry, for example, sees return on equity at levels in the mid- to high-teens, according to annual reports from Canada’s Big Six banks. The insurance industry has seen its ROE drop from 10% in 2015 to 4.6% in 2018, according to Insurance Bureau of Canada’s 2019 Facts publication.

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In the fall of 2019 — well before the pandemic was officially declared in March— Intact CEO Charles Brindamour said that the ROE number would need to reach 10% in order to get out of the hard market, adding that the chances of slowing down premium increases were “fairly small” as a result.

“Are we going to win as an insurance industry or not?” Mered asked, also noting that there were 12 recapitalizations and rights offerings taking place, mostly from Bermuda and Lloyds-based players. “We keep hearing from our friends in the investment banking industry that there’s a lot more in the pipeline.”

So then the question becomes: Will these players get the capital they’re asking for in order to maintain the flow? And will it be enough?

“Two of them have filed for rights offerings for IPOs and capital-raising [events] and each are trying to raise about $1 billion,” Mered reported. “Will they get more and will it be enough to make a dent in our current situation?

“I think there’s going to be a lot of hard work for us to prove to investors in general and our current shareholders that we are here for the long haul and we are responsible actors,” he continued. “We will not only take care of our customers but do this in a financially, most-prudent way. There will be disruption and there will be some losers along the way.”

However, the more diversified a company is, the better they’re surviving the COVID-19 pandemic, Mered said.

“It’s telling that those firms that are the most diversified, both in terms of geography, segments, lines of business, were the ones who I would say are doing fairly well from a solvency perspective and liquidity perspective,” he said. “Yes, I’ve seen market cap drop and that’s the judgment of shareholders and analysts but in terms of rating actions, we haven’t seen those threatened or even discussed for those types of firms.

“Others that, I would say, are fairly monochromatic in terms of line of business or customers segment or even in geography, are struggling.”

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