With severe weather losses, insurance carriers need to ‘re-think’ how they underwrite

After three years of industry-wide insured losses from severe weather exceeding $1 billion per year, Canadian insurance carriers need to “re-think” how they price their coverage and what they cover, suggests the head of a major Canadian carrier.

“Unfortunately it has become a trend for the last four or five years,” said Fabian Richenberger, president of Northbridge Insurance, during a panel held Wednesday by the Property Casualty Underwriters Club.

Insured losses, industry-wide in Canada, due to severe weather were $915 million in 2010, $1.7 billion in 2011, $1.2 billion in 2012 and $3.2 billion in 2013, according to Richenberger.

“It used to be we would have a billion-dollar loss every four or five years and that’s how we would price our products,” he said.

“The implication of that is we have to re-think how we underwrite, how we price our business, what type of coverage we provide. At the same time, we have to make sure, as an industry, that we provide better incentives to our customers so that they install sump pumps, that they use hail resistance materials, things like that.”

He referred to the June, 2013 floods in southern Alberta, which caused economic losses of about $5 billion and insured losses of about $2 billion. Less than a month later, a rainstorm July 8 in Toronto caused “surprisingly expensive losses,” Richenberger added.

Richenberger suggested that in 2013, Canadian P&C carriers’ actual combined ratios were around 104%, when they should be in the range of 93% to 94%, especially with low interest rates.

The low interest rates are one “headwind” for insurance brokers, said Brian Parsons, managing director of Marsh Canada Ltd., during the PCUC panel.

“Interest rates used to be a huge deal to our business for brokers,” Parsons said, because brokers would pay insurers, in some cases, 60 days after they received the premiums from clients.

For those who own brokerages, the agreement by Arthur J. Gallagher to acquire Noraxis Capital Corp. from Roins Financial Service Ltd. is “good news,” because of the amount Arthur J. Gallagher is paying, Parsons suggested.

“You are looking at about a $100 million business that was sold for $400 million or a ratio of four times revenue,” Parsons said. “It’s good new for brokers. The owners of brokers are all very happy about that.”

By comparison, Parsons noted, when Marsh & McLennan Companies Inc. acquired brokerage Johnson & Higgins  in 1997, Marsh paid US$1.8 billion for a firm with annual revenues of US$1.2 billion.

“That was an earth-shattering deal at the time in our industry, the biggest of its kind,” Parsons said of the Johnson & Higgins acquisition. “The ratio (of price to revenue) was 1.5 to 1. Now it’s 4 to 1.”