Surrounded by challenges on all sides, the insurance industry has to “get back to basics”

Surrounded by challenges on all sides, the insurance industry has to “get back to basics” | Insurance Business

Surrounded by challenges on all sides, the insurance industry has to “get back to basics”

For Markel Canada’s newest president, there isn’t just one key issue that he’s paying attention to as he begins his leadership of the company in 2019. As heightened cybersecurity risks, natural catastrophes, a talent shortage, increased regulation and many other challenges face the Canadian insurance industry today, David Crozier told Insurance Business that the problem is they’re all top of mind.

“They’re all materially impacting our industry as we speak,” he said, pointing first to the impact of climate change and the consequences of inaction. “Climate change is battering our customers, it’s battering our industry, yet the challenges presented by climate change – the need to improve infrastructure and build a more sustainable world – are in some quarters falling on deaf ears of governments who ignore the increasingly loud voice of science. Those governments hope that things aren’t changing, and that is not a sustainable response to something that is very obviously having a material impact on our world.”

With the insurance industry being a financial staple for people and businesses across the globe, and thus a significant part of the fabric of society, it needs to help address the effects of climate change, added Crozier. This is particularly because as losses mount from wildfires, earthquakes, and many other natural perils, it’s not enough to simply charge more premium to cover for potential future damage.

“That’s a stopgap at best. Eventually, it can’t be sustained and you can’t put the load on the taxpayer either,” he said. “Add to that both the uninsured and economic impacts, and the picture darkens even further.”

At the same time, inflation is driving up the cost of goods and services, which has to be accounted for in insurance policies by adequate reassessing and ensuring that there’s value placed on properties and other physical exposures.

“I don’t know of many buildings that have the same value year-over-year, or contents that have the same value year-over-year,” said Crozier, “and I don’t know of businesses that don’t shrink and grow, so we need to make sure that as values change, revenues change, and customers change, that we account for that or else we’re building on a shaky foundation.”

Claims are also being driven higher as a result of other developments. Cars contain more technology, as do buildings, which makes repairs costlier. Healthcare costs are rising, which makes it more expensive to get people back on their feet following accidents. Even in Canada, people are more often seeking indemnification through the courts, leading to a rise in lawsuits and class actions, all of which is impacting the insurance industry, according to the Markel Canada president. One of the biggest long-term risks, however, is the change in interest rates, which have almost nowhere to go but up.

“They’ve been low for so long that we’ve been lulled into a false sense of security, and if interest rates are higher in the future – and they will be – then insurers need to account for that now,” he said. “Particularly in long-tail lines, we’re charging premium today for a risk that is going to manifest in a loss not tomorrow, but potentially 20 years from tomorrow. We’ve got to realize that risk, when it’s realized and when it comes to fruition, interest rates and inflation are going to push up the cost of that.”

There isn’t a simple solution to the list of challenges that are having an impact on the insurance sector in Canada, but Crozier does believe that the industry has to “get back to basics.”

“We have forgotten that we need to ensure there’s appropriate coverage and adequate premium to address the risks of our clients and when coverage is inappropriate or premium is inadequate, it’s not sustainable,” he said, pointing to some of the actions undertaken by Lloyd’s of London in recent years. “They were in response to chronic unprofitability and ensuring that the underwriting discipline was thinking about long-term, sensible, sustainable business practices.”

When Lloyd’s announced that it would be carrying out a strategic review of all aspects of its business following a £2 billion (about CAD$3.4 billion) loss in 2017, part of that review focused in on the bottom 10% performing lines in its books. Since then, some syndicates have exited specific lines because of struggles to deliver consistent profitability.

“That’s a condemnation of our industry. Failure to offer sustainable terms and conditions catches up with us as an industry, and the issue is that it doesn’t weed out weaker players, nor does it position any company for greatness,” said Crozier. “It tarnishes our entire profession because we lurch from crisis to crisis, as there are times we seem incapable of managing our own products and our own business. Rates have been driven down to unsustainable levels for too many years across virtually every product – you can see the results in government and private auto insurance alike, for example.”

Property insurance, professional lines and increasingly even liability are being affected by unsustainable rates as well, added Crozier. Amidst these hurdles, “A top of mind challenge for the industry is getting back to basics and understanding how to do our jobs,” he said.