The insurance market in Canada is firming up fast. As the market transitions from soft conditions, brokers, carriers and clients are having to consider risk transfer with a new eye. For many in the younger demographic of the industry, the firming rate environment – which has been driven partly by high frequency and severity adverse weather losses in Canada – is a novel situation and one that they must adapt to.
Despite this market transition, insurance broker Aon’s view is that the Canadian marketplace remains attractive and sufficiently capitalized. In its 2019 Insurance Market Report the organization describes Canada as an attractive location for capital development. The broker points towards the Canadian industry’s cumulative net combined ratio of 98.3%, which compares favourably with the US (98.6%) and UK (99.7%) markets.
Russell Quilley, Aon Canada chief broking officer, commented that insurers’ capital positions remain strong for primary and reinsurance markets in Canada, despite the 2017-18 period seeing some significant catastrophe or adverse weather losses. However, he also warned that insurers need to adapt quickly “in a volatile business environment,” adding, “it’s imperative for industry players to not only understand the impact of weather-related events and other changes, but also leverage the tools and expertise available to them.”
Most insurers in Canada seem to agree that the market is transitioning somewhat. Earlier this month, Linda Regner Dykeman, chief agent of Canada at Allianz Global Corporate & Specialty (AGCS), told Insurance Business the market has changed “very rapidly over the last 12 months”. She commented that some of these rating pressures “have caused a bit of a shift in the industry” and have almost spurred ‘back to basics’ underwriting, with underwriters asking the right questions in order to understand the risk and price it accordingly.
Quilley and Dykeman’s sentiments are shared by David Thompson, senior vice president, operations, at FM Global in Canada. Speaking with Insurance Business at the RIMS Canada conference in Edmonton, he said: “Everybody’s talking about the changes going on in the marketplace. I’ve been in the business for 35-years, so I’ve been through a few hard markets and a lot of long, soft markets. The reality is, this hardening market is a little bit different than most because it’s not centred around a withdrawal of capacity from the market. There’s still a lot of capital in the Canadian insurance market.
“This change is about risk appetite. Insurers are recalibrating their risk appetites, trying to work out how much they’re willing to risk and what price they want for risk transfer. This is different to any other [market transition] that I’ve gone through in my career in that nobody’s lost the ability to insure. They’re just choosing not to enter the market unless the pricing and the terms are adequate.”
Mirroring Dykeman’s comment about reverting back to basics, Thompson said that’s exactly what FM Global is focusing on. The property insurer’s underwriting strategy revolves around four key questions: What does the current deal look like? What’s the risk quality of the account? What’s the catastrophe exposure of the account? And, what’s the loss exposure of the account?
Thompson commented: “It’s pretty basic, but it’s amazing just how much the market has drifted away from those basics in the last decade. It used to be: ‘Here’s the price – take it or leave it.’ Now, it has become more than just a pricing decision. Now it’s about price, risk quality, and exposure – it’s much more. For someone who’s been doing this a long time, that’s nice to see. This isn’t a knee-jerk reaction that we’re seeing in the market. It seems to be a very structured approach from a lot of insurance companies in terms of how they’re approaching this market.”
Liberty Mutual Canada CEO, Garth Pepper, also shared some thoughts with Insurance Business about the state of the Canadian marketplace. He described it as “a firming marketplace in a number of lines,” but added that he didn’t think it was a “long-term sustainable situation.” As the insurance market cycle typically goes, when rates firm up, that will drive improved results in certain areas, which in turn will drive additional competition and capacity to enter the marketplace until it recalibrates again.
For Liberty Mutual Canada, the firming marketplace has actually thrown up a few opportunities.
Pepper explained: “We’re in a really strong position in the marketplace given that we’re in growth mode, and some of the rate situations in the marketplace are accretive to that. It helps our strategy of driving growth, regardless of what the market as a whole is doing. Meanwhile, some of our competitors – not all of them – are distracted with having to fix certain portfolios or get mandates from a global perspective to implement in Canada. We’ve got a lot of autonomy to do what we need to do here in Canada. Our main focus is: How do we run our business as efficiently as possible so that we can offer our products at a competitive price, regardless of what the market’s doing? We want to be a consistent and stable marketplace for our customers.”