The Canadian commercial lines insurance market is hardening. Carriers are pushing for more rate, they’re tightening their policy terms and conditions, they’re increasing deductibles, and they’re assessing how much participation and capacity they’re willing to retain on accounts. It’s a very different market to 10-years-ago.
Firming conditions in commercial lines have been “a long time coming,” according to Rowan Saunders, president and CEO of Economical Insurance. It’s part of the insurance industry’s traditionally cyclical nature. However, speaking on the CEO panel at the IBAO Conference in Toronto, Saunders described the current hard market as “more of an earnings-driven cycle than a capacity cycle.” He attributed the shift to inflation trends, lower investment income, and a drop in underwriting standards after a decade or so in soft market conditions.
“I think some of this has to do with societal change,” said Saunders. “If you think about factories a number of years ago, they were big buildings with lots of people inside them. Now, there’s fewer people, there’s robotics, and there’s heavy automation. There’s a lot more concentration of values, and, as that has changed, loss cost inflation has grown faster than pricing. I think the industry listens and learns, and we’re catching up to a loss cost trend that has been much greater than the pricing trend. We’re seeing a return to more disciplined underwriting, with underwriters saying: ‘We need to price for the actual experience and also the exposure.’ That’s something that was lost a bit in the past.”
In conjunction with Canada’s commercial insurance loss ratio hiking up, another significant and ongoing development has impacted the market. Lloyd’s of London - which has traditionally been one of the larger commercial insurance underwriters in Canada, in addition to providing significant capacity to Canadian MGAs - has started to retract from the market.
“We’ve seen significant changes in Lloyd’s willingness to underwrite in the Canadian market,” commented Carol Jardine, president of Canadian P&C operations at Wawanesa Mutual Insurance. “For whatever reason - regulation, new compliance requirements, or new capital requirements at Lloyd’s – we’ve seen capacity become restricted from the Lloyd’s underwriters. At the exact same time as Canada became less favoured by the Lloyd’s underwriters, we saw the commercial loss ratio in Canada go up by 20 points. Until the losses get under control, and the pricing gets under control, I think we’re going to be in this hard market for a while. This is not unique to Canada; it’s a global hard market.”
How long these challenging market conditions will continue in Canada is uncertain. According to Heather Masterson, president and CEO at Travelers Canada, the fourth quarter of 2019 is “going to be very telling,” especially in terms of how Lloyd’s distributes its capital.
She said: “Lloyd’s distributes its capital in Canada in one or two ways. Either you tap into Lloyd’s through an open market, or you tap into Lloyd’s through a coverholder. We have 350 coverholder agreements in Canada; we’re not really that large of a country to have 350 coverholder agreements, and yet we do. They’re really measuring and monitoring their premium income contract by contract, so it’s going to be interesting to see what happens in the fourth quarter and how much trajectory we have for this market condition into 2020.
“Profitability has been eroding year over year for a decade. When you take a look at the 2018 year-end results, we were around a 100% combined ratio as an industry, the return on equity was around 6%, and 75% of our income came from investment net income. That’s not sustainable. So, [this market] really is a rebalancing and a re-path back to profitability.”