Cautious Optimism

It’s the end of the world and the Canadian insurance industry feels fine. That’s the general impression the industry is portraying, after the Insurance Bureau of Canada (IBC) confirmed in March what brokers across the country have already been indicating: the country’s insurance market cycle is turning soft.

On the face of it, it seems odd to be talking about a softening market at the same time property and casualty insurers are worrying about record-level cat losses throughout the country. And yet, no one in the industry appears to be hitting the panic button and re-jigging the scope of cat coverage or increasing homeowners’ rates.

True enough, commercial and residential rates are starting to decrease. And a relative stability exists on the auto side after several provinces implemented new government regulations two or three years ago. It helps that some new foreign capital entering the Canadian market.

You can almost hear a tentative, self-congratulatory tone at industry public functions. And why not, really? Investment and capital increases, as well as solid underwriting over the past few years, have helped Canadas insurance industry weather some pretty nasty natural catastrophe losses – including flooding in Qubec and CD$400 million in insured losses after an August storm in Ontario. In terms of man-made disasters, Suncor’s explosion at its oil facilities in January 2005 heaped an additional CD$1 billion onto the pile of insured losses for the year.

Nevertheless, despite observing a general state of stability and optimism, the industry’s tone of self-congratulation is anything but smug. Thats because the question remains: After saving up its proverbial allowance during the last few years of the hard market, are insurers suddenly going to blow all their hard-earned cash on the industry’s equivalent of a new Hummer – that is to say, the pursuit of market share?

If history tells us anything, it shows that the insurance market oscillates naturally between hard and soft markets. During hard markets, premium rates increase and coverage is tighter, and the end result of this is that insurers make more money. The profits eventually find their way back to consumers when insurers step in to cover the policyholder’s next major catastrophe.

During soft markets, premium is generally lowered and the availability of coverage expands. Companies sign up more policyholders and outperform their competition; in turn, this propels companies towards that most coveted of goals – cornering market share.

How important is market share? Whatever people may say about the value of a competitive market, it always seems to come down to who controls the market and by how much. Capitalism preaches competition, but its dynamics tend towards oligopoly. Competition is nice, but only when your competition is doing worse than you.

So we can probably expect to see some competitive pricing in a capitalist marketplace. It’s the way the marketplace works. This time, however, will insurers be able to keep the pendulum of market dynamics from oscillating wildly from one form of market to another? No one needs to be reminded that radical soft markets quickly rebound to radical hard markets, as insurance companies try to make up for the capital they burn in pursuit of slashing prices and gaining market share in the process.

Has the industry learned from its past?

To its credit, the industry appears to be much more reasonable this time around. To date, market softening appears to be gradual, not radical, which is as it should be. Now is the time to be – as politicians say whenever they are ecstatic about their good fortune – “cautiously optimistic”.