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2010: The Year in Insurance

Industry representatives may not agree on everything that happened this year, but they all seem to be hoping for a brighter 2011.

Last year put a terrible strain on the insurance industry–or, last year could have been worse. Next year, we’ll see a better market. Or, 2011 will be just as bad as 2010.

These are the kinds of disagreements we collected from senior executives among carriers, brokers and restoration companies for our year-end roundup.

And given these disparities, you might wonder if this is a single industry after all–perhaps insurance is much more a collection of different sectors that happen to come together to provide insurance coverage across a range of products and services. But despite their differences, industry spokespeople do share certain points of view: that it isn’t clear when, exactly, the soft market will end; that consolidation among carriers and brokers will continue to affect the sector; and that specialization could be the key to success.

Our interviewees hail from various parts of the insurance landscape:

• Rowan Saunders, president and CEO of carrier Royal & Sun Alliance Insurance Company of Canada (RSA)
• Michael Wills, CEO of carrier Ironshore Canada Ltd.
• Mark Rankin, managing principal and president of insurance brokerage Integro Ltd.
• Bruce Derraugh, president of restoration company FirstOnSite Restoration LP
• Greg Madill, president Upper Canada Adjusters Inc.

Read on for insights into what 2010 was all about–and what may be in store come 2011.

Q What issues affected the insurance industry in 2010?

A On the commercial side we’re still seeing the impact of a soft economy and a very benign GDP growth undermining reasonable profitability in commercial insurance. It’s still a very competitive marketplace with a great degree of price sensitivity from commercial customers still trying to recover from the economic downturn.

Rowan Saunders, president and CEO, RSA

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In terms of personal lines, the impact of severe weather and water damage continues to make the personal property account a very unprofitable business. We had some tornadoes in Ontario in June and then we had the Calgary hailstorm which I believe will be the biggest hail event in Canadian history. And then a couple months following that we had Hurricane Igor over Newfoundland and we currently have some flooding now in Nova Scotia.

If you look at the top 15 insurers who control the vast majority of the industry’s market share, you have some insurers still performing exceptionally well with solid ROEs, very low combined operating ratios and growing. And you have other insurers that really are struggling and will continue to struggle for a couple years.

Q What do you think will happen? Will we see some carriers going out of business?

A I don’t think we’ll see companies going out of business because there is a lot of capital in the insurance industry. But I do think that the profitability returns will lead to either an acceleration of consolidation or a change in company strategies.

Q In 2010, we saw the debate ramp up about employing credit scores to measure risk. RSA doesn’t use credit scores, but could this be one of the strategies that carriers will increasingly turn to?

A There is definitely some evidence that it is an accurate and significant rating variable; however, it is running into a lack of political support from some broker organizations and certainly regulators. And so it looks like that will be a tool that will be removed from the industry, in which case I think there’ll be greater pressure to use a lower cost platform than we have today as it will become more difficult to refine your pricing and your segmentation.

Q We’ve seen more and more competition from direct-to-customer insurance carriers. Do you think the broker channel is in jeopardy?

A Absolutely not. We’re very confident that there is a very strong and viable future for the brokers in personal-lines distribution. What we are doing with our brokers is working to invest in that channel but we are working to do things differently. We are working to provide sharper propositions to customers that really value and need the advice and support of the broker.

These are customers that typically have more complex insurance needs and certainly value the modest additional price that it costs buying through an advice-based channel as opposed to a direct channel.

Q Ironshore is relatively new here in Canada, having started operating in 2007. What are the opportunities like in this market for your firm?

A As a specialty insurer, we focus on core businesses such as directors and officers, professional liability, and financial institutions.

Q There has been plenty of discussion about Canada’s corporate brain drain–the fact that many Canadian companies are being acquired by foreign businesses, with directors and officers now stationed abroad. How does that affect your business?

Michael Wills, CEO, Ironshore Canada

A That’s a good point because we find that, especially in our directors and officers business, there’s really not many pure Canadian risks left anymore. Whether it’s Potash or mining companies or any company doing business overseas or in the United States, there’s an element of foreign risk. It’s an opportunity for us. We have an ability to write international business. There’s much more concentration of foreign directors or foreign assets in Canada. Some Canadian insurance companies like to stay in the Canadian domestic market. I think we have a bit of an advantage because we have a global footprint in London and in Bermuda and the United States. It enables us to service our clients that have the need to protect their assets outside of Canada.

Q How has the sluggish economy affected your business?

A Companies are trying to cut costs and maybe laying people off, but they’re also looking for ways to save money, so they might be buying less coverage. That affects the premium income in our industry.

But in a positive way, there has been in the last three or four years an influx of new insurance companies in Canada. These are, like ourselves, branches of or subsidiaries of other foreign companies, whether they’re Europe-based or U.S.-based. Canada is an attractive place for foreign insurance to do business, so we have a competitive marketplace. It creates a huge challenge and it’s not really a growing industry right now.

Q There has been quite a lot of consolidation in the industry. How do you think that will play out in 2011 and on?

A Probably more on the broker’s side than we’ve seen on the company side. There are 200 or so commercial insurance companies in Canada. That’s for a relatively small marketplace. We probably need to see more consolidation. Whether that’s going to happen or not,

I guess time will tell. I think there are companies that are certainly shrinking premium. There’s quite a pressure on expenses and I think this year and next year you’re going to see more of that. You’re going to see companies laying people off, or you’re going to see maybe some consolidation, companies trying to get greater economies of scale.

I think it’s probably overdue for that to happen.

Q The poor economy has affected businesses across the country. How does that impact carriers and brokers?

A Insurance buyers, they’re closing plants. They’re laying off shifts. Their revenues are down and so the insurance capacity that they would normally use when they’re running at full steam, they don’t need anymore. There’s an oversupply of insurance at the marketplace. It puts further downward pressure on an already soft market condition. It drives prices down and insurance companies suffer through that. Brokers who are on large product commissions, they ride that down as well.

Mark Rankin, managing principal and president, Integro

Q What do you think has to happen before the market turns around?

A I think really what has to happen — and it’s a terrible thing that we’re an industry that lives off of catastrophes –but there’s going to have to be a significant insured catastrophic event. That typically means a few hurricanes that hit a large populated industrial sector like Florida or the Gulf Coast. We’re coming to the end of yet another hurricane season and there were a number of hurricanes this year, but nothing that created a large insurable loss.

Q How would a large insurable loss help the industry?

A Look at Hurricanes Katrina and Rita, which both happened in 2005–both catastrophic events. They created a large number of losses. But eventually those losses are paid out. By definition, premiums have to go up. And as the premiums rise over a period of time, all insurance companies benefit from that, keeping in mind that insurance companies are very adept at compartmentalizing their risks so that no one single insurer is going to be dealt a deathblow because of a hurricane in Florida.

Brokers who are similarly in large product commissions will ride it up. It will be a boom to the industry, but then the investment world will dive into the marketplace, and eventually it will become oversupplied, and it will drop again.

Q What does 2011 hold?

A I think the economy is going to be a challenge. The soft market’s going to be a challenge. Finding talent is going to be a challenge. The one area that I see benefiting is the smaller niche brokers out there. I think brokers, to be successful, have to be a little bit more specialized and a little bit more focused than they have been in the past. I see that a lot of sophisticated buyers of insurance are now moving away from that one-stop shopping, one-size-fits-all model where they go to one broker for everything. I think they’re starting to look at their insurance brokers like they do their lawyers and their bankers. They’re looking for specialists in niche areas that can provide them very specific solutions to very specific issues. I see an opportunity there.

Q As a restoration-services company, how do you see 2010–was it a good year or a bad year?

A The weather conditions have really had both a positive and a negative impact on the overall insurance industry. It has been a boost to much of the property and claims. The sheer number of claims is down and therefore, from an insurance perspective overall, they’re seeing their profitability statements are up quite dramatically.

Bruce Derraugh, president, FirstOnSite

Q So from your perspective, 2010 wasn’t as bad for weather as previous years?

A If you look at 2010 in some markets, like in Ontario, it was the warmest ever recorded and so obviously that has an impact on the number of claims. I think that has been good for carriers, and not so good for us.

Q How did that impact your business?

A Because we’re national, it’s had less of an impact compared to somebody who might be just in one province like Ontario. They’d be down considerably. We were able to take advantage of other markets where we may have had a significant amount of claim activity.

Q So while Ontario was quiet, you were busy in Saskatchewan, for instance.

A Our Manitoba-Saskatchewan business and certainly Saskatchewan was the biggest use we’ve ever had. There were the Yorkton floods and there was a considerable amount of rainfall. You just talk to any farmer in Manitoba-Saskatchewan and they had one of the wettest summers ever, whereas B.C. was quite a bit drier, and then there’s typical hail that would happen in Alberta, and most recently in Nova Scotia–much busier in Nova Scotia.

Q There’s a growing awareness of “sustainability” and “green” business practices. How is that impacting the restoration sector?

A Instead of replacing a full wall, are you able to replace only a portion of it? That would then reduce the amount of drywall that would need to go to landfill. The chemicals we use–because we have many disinfectants–we make sure that the chemicals are green and standard, that we are trying to reuse as much as possible. It’s how do you reduce the amount that’s going to the landfill and at the same time, do you have techniques and are you using products that are not going to be hurting the environment?

It’s twofold. It saves the insurer money because we’re not replacing the whole wall so the amount of time and labour would be reduced. The second piece is we’re not putting as much into the landfill so we’re helping the overall environment.

Q The economy has been poor. How has that affected your business?

A There’s a direct causal relationship between the economy and the amount of claims that we see. There are two schools of thought there. One is that if you have 100 businesses generating claims, you’re going to have, strictly from an underwriting standpoint, a certain percentage of those businesses making claims. If all of a sudden you’re down to 80 businesses because 20 are consolidating or out of business, your claims volume is down by 20 per cent. The other side of the argument says you have a lousy economy and businesses lean towards insurance claims to supplement their revenue. Your fraud goes up. I don’t necessarily buy into that theory, but it certainly is floated out there.

Greg Madill, president, Upper Canada Adjusters

Q Staff recruitment and retention are persistent challenges. How do these issues affect the industry?

A My partner and I both came into the business under a model that was, you got hired, you mentored, you trained with a seasoned independent adjuster, you took your insurance courses, and you got licensed. You learned the job, on the job. What we’re seeing now is a lot of people are being parachuted into the adjusting community from school, so they have the knowledge base, but they don’t always have the practical experience in day-to-day claims management. There’s a difference between those two skill sets. In adjusting, every day is different. Until you’ve seen a problem and addressed that problem, you need guidance. In a mentoring program, you get that guidance. If you’re just parachuted in, you don’t. The independent adjusting fraternity is picking up on that, and there is a fairly active program for IAs for training and mentoring.

Q What’s your impression of how 2011 will unfold?

A I think it’s very favourable. The adjuster is really the product that the insured has acquired. The consumer is looking to collect on that product. I don’t mean they want to profit from an insurance claim. They want to be looked after in the terms of their contract with their insurer. That will always be the case.

Technology seemingly makes the business go faster. Two years ago I would get 100 phone calls a day. Today, I might get six phone calls and 200 emails. There’s a lot more contact, and it’s quicker. The consumer’s looking for fast turnaround on everything. If you embrace the technology, use the tools, things will be good.