National Broker Survey: Signs of Softening

Insurance brokers across the country are enjoying a refreshing period of quiet, stable markets. At the same time, Canadian brokers, faced with gradually declining rates – particularly in commercial and residential lines – are waiting for the proverbial other shoe to drop.

Noting the cyclical nature of the insurance business, brokers seem to be awaiting the inevitable return of hard market conditions. The big questions are: When might this happen? And how far will this pendulum swing towards lower, softer rates before insurers compensate by raising rates once again?

For now, however, most brokers’ associations describe their local markets as “stable.” And clearly they would like for insurers to keep it that way. The goal is to keep market rates from oscillating wildly between premium increases and decreases, brokers note. As Insurance Brokers Association of Ontario (IBAO) chief operating officer Randy Carroll put it: “It’s very hard to talk to somebody and say: ‘Your insurance premium has increased by $30,000,’ and next year go back to them and say: ‘Your insurance premium has decreased by $20,000.’ It’s a difficult thing for a broker to do.”

Canadian Underwriter was able to contact seven insurance brokers associations across Canada. The association representatives were asked to describe market conditions in their area. Our questions included:

* What are rates like in your area?

* How are individual lines doing?

* How would you describe market capacity in your area?

* What market trends are you seeing?

* What political issues concern your association?

Based on answers to these questions, we present a snapshot of the kinds of issues and market conditions brokers are facing across the country.

WESTERN CANADA

B.C.

“The market’s pretty much stable, from a particular class point of view,” Doug Guedes, the first vice president of the Insurance Brokers Association of British Columbia, reported.

Having said that, and contrary to a pattern seen elsewhere in the country, he observed the future in B.C. may hold some increases in the residential and commercial property lines.

“There has been so much construction out here,” Guedes noted. “Because of the Olympics and a hot, hot housing market, the cost of construction has gone up fairly substantially, so we’re pretty much re-examining a lot of our replacement cost values for the places that we insure – both commercially, and on a residential basis. The cost of reconstruction is fairly high. The more insurance you have to buy to get the appropriate amount of insurance, the more it’s going to cost.”

Guedes said market capacity doesn’t appear to be an issue in B.C. right now, although he added the province’s brokers have heard of “some pinching going on” when it comes to catastrophe treaties on very large schedules. “We haven’t noticed anything as of yet, but most companies are paying more for their catastrophe treaties than they were last year,” Guedes said. “In large part, that is due to Katrina and the other hurricanes that occurred down south are soaking up the worldwide market. But we haven’t seen any real expressed intentions by companies that they must get increases.”

Even if catastrophe treaty rates increase, Guedes added, the end rate for the user isn’t that much. “Between 3% and 5% is what you’re going to see,” he predicted. “We may see that later on the year. That’s difficult to say.”

ALBERTA

Overall, the Alberta marketplace has shown “strong conditions over the last 3 years,” according to the president of the Independent Insurance Brokers Association of Alberta, Lorne Rye.

“No one likes to use the word ‘softening,’ but [conditions are] certainly more bearable.”

Rye said Alberta has seen a leveling of rates and maybe some re-shifting of property and commercial rates from one line to another. But the overall impact on rates is zero, and maybe even a slight decrease in rates, he said.

“Rating seems to be very adequate,” Rye said. “As a matter of fact, it’s becoming more competitive again. Auto reform specifically has led to stability for consumers [and we] certainly see some good, positive outcomes from that.”

The positive outcomes of the October 2004 auto reforms have come at some cost to the province’s brokers, however. Rye noted Alberta brokers have been working hard to learn a new grid system for determining insurance ceilings.

“We’re about 15 months into it [the new system],” Rye said. “Basically, it places all private passenger vehicles on a grid system. You start at a base zero and then, based on the individual’s history, it places you up or down on the grid when you’re establishing the maximum premium that can be charged by any insurer….

“It’s created another level of workload. You have to first be able to establish their grid placement, and then go through the normal coding process to see if it hits grid or not. It does take more time, more work and more effort. We’ve just done a recent survey that will show that auto reforms have cost the broker bottom-line revenue.”

Overall, though, the net effect of the changes is positive, Rye said. “I think we [brokers] allowed ourselves to visualize what the marketplace was like three years ago [and] as far as placement of some consumers now, the reforms have certainly made it easier for all three parties [brokers, insurers, consumers].”

SASKATCHEWAN

As in other areas of Canada, Saskatchewan’s commercial market is starting to soften, according to Michael Van Dorpe, president of the Insurance Brokers Association of Saskatchewan (IBAS).

“Definitely you see that here,” Van Dorpe said. “You’re seeing the underwriters being a little more flexible on what they want to write. You can definitely tell the differences with the rating, which is an unfortunate thing: that’s what puts us into the hard market situation again. When underwriters start getting way, way too flexible, everybody starts dropping their rates back.”

Ernie Gaschler, the executive director of IBAS, added: “I do hear some rumblings that a little more variety to the markets that we have here would be appreciated. Certainly from a broker’s perspective, having more markets is always better.”

As for auto insurance, Van Dorpe added, Saskatchewan’s situation is similar to that of Manitoba’s. “Right now, we’re not seeing any rate increases,” he said. “In fact, SGI announced a rate rebate from prior years. Our rates, I think they’re probably still pretty good in relation to the rest of the provinces.”

All told, the Saskatchewan market appears to be among the more stable in the country. If there is any uncertainty at all in the Saskatchewan insurance market, it’s based on what might happen as a result of the current review of the Bank Act, Van Dorpe observed.

Specifically, the association wants to make sure credit unions are excluded from selling insurance products out of their local branches. “Almost every town in Saskatchewan has either a credit union or a credit union affiliation,” Van Dorpe said. “So if you let the credit unions start retailing insurance out of their branches, it’s just going to drive the local broker right out of business because he can’t afford it. [Brokers] can’t afford the deep-pocket advertising and all the money [credit unions] can throw at all their clients.”

ONTARIO

Stability in Ontario is also the order of the day.

“Stability is there on the commercial side like we haven’t seen it in a number of years,” Carroll said. “The small-end commercial line seems to be doing pretty well. Even on the commercial side, we get reports from our brokers back on a monthly basis across the province, and it looks like the stability’s there.”

Carroll said Ontario brokers haven’t seen the adverse change of premium they have seen in past years. “Companies have stuck to thei r underwriting philosophies and their underwriting rules,” he noted. “We don’t see anybody out there trying to gain market share like crazy, which is a positive thing.”

In the auto line, Carroll observed insurers are starting to call on the government for rate increases. “A couple [of insurers] have announced price increases for ’06,” he said. “[Claims] frequency is on the rise, and I think that has a lot to do with the fact that, as an industry, we’ve dealt with a majority of concerns that consumers had in regards to reporting claims.

“For example, you now have companies that have introduced the ‘One-strike-free’ rule, where an insured can report a claim and it’s not going to have an effect on their premium at the end of the day.”

With the increase in claims frequency, insurers are going to have to stay ahead of the curve and consider price increases – the effect of which won’t be clear until one or two years down the road. “I would guess that most of the insurers in the province will take slight increases in 2006, and then re-evaluate in 2007 to see what their next step should be on a go-forward basis in regard to price,” Carroll said.

As for catastrophe losses, the Ontario market appears to have absorbed one of the biggest weather-related insurance events in history. The August 2005 storm dumped between 153 mm and 175 mm of rain in the Toronto/Kitchener areas and saw tornadoes hit the Salem/Fergus area, causing between $400 million and $500 million in insured damage losses.

Nevertheless, the storm doesn’t appear to have affected the province’s market stability, Carroll noted.

“We haven’t heard any concerns from our GTA brokers with regard to availability (after 2005 storm),” he said. “We haven’t heard any concerns with regard to price. I haven’t even heard any horror stories in regard to claims coverages, etc. being denied and availability of product on renewal….

“There was a lot of talk and a lot of concern, but at the end of the day I think things have turned out well.”

QUEBEC

Qubec’s insurance market – particularly the auto market over the past five years – has been doing very well, according to Hubert Brunet, the executive director of the Regroupement des cabinets de courtage d’assurance du Qubec.

Nevertheless, Brunet predicted Qubec consumers might experience rate increases in the future in the areas of auto and residential. “Commercial property is a concern,” he added.

Projected rate increase in residential lines can be expected because of “the flooding that has occurred” in Qubec, said Brunet. “Weather-related flooding [in Qubec] has increased, causing more damage.”

On Apr. 28, 2005, as much as 100 mm of rain fell across Qubec and New Brunswick at a time when snow was melting feverishly, creating prime flood conditions. Rivers across Qubec overflowed causing landslides and washed-out roads. In Montral, according to Environment Canada, total rainfall in 2005 was close to 390 mm or 145% of normal.

In the auto line, the Socit de l’assurance automobile du Qubec (SAAQ) announced in early March 2006 that it will be holding public hearings on a proposal to increase its public auto insurance contributions as of 2007. It would be the first such increase in the province in almost 12 years, according to a Qubec consumer group.

Still, Brunet said, “auto has been doing well for awhile now.” He attributed the low, stable auto rates in part to the insurance industry’s ability to keep down claims costs in the province. He noted this has been achieved in part by working closely with auto repair facilities to “negotiate the best costs possible for consumers.”

Brunet said brokers in Qubec have been keeping an eye on recent regulatory action by L’Autorit des marchs financiers (AMF) concerning allegations of unlicensed insurance sales.

Key cases before the AMF involve allegations that car dealers are selling car warranty coverage, and recreational clubs such as snowmobile associations are offering their members special coverage. These products “are, in fact, insurance,” Brunet said.

On the topic of consumer protection, Brunet noted the AMF has recently posted draft regulations on the issue of transparency and disclosure. Among other things, the measures call for the verbal disclosure of share ownership and contingent profit commissions on the sales of insurance products.

Brunet said Qubec brokers have been working with the AMF for some time on the new measures and the draft didn’t contain any surprises for brokers. “It’s a happy ending for brokers,” Brunet said of his preliminary view of the draft regulations.

Qubec’s brokers’ association is also concerned about what will happen in the wake of the demise of the CSIO Portal project. The goal of the Portal was to create an industry-owned, multiple-entry, single sign-on technology solution that would allow brokers to obtain online quotes from various insurers.

“We should have a universal [technology] solution,” Brunet said. “We have to get on it. We need something that will allow all brokers to work with all insurers through one system.”

ATLANTIC CANADA

NEW BRUNSWICK

About a year and a half ago, the New Brunswick government announced $2,500 cap on the amount auto collision victims could recover for non-economic losses such as pain and suffering. The new legislation – which established a rates review board – was a key factor in the current stability of the province’s insurance market, according to Luc Caissie, the president of the Insurance Brokers Association.

“If you look at personal lines, I’d say on the auto side, with the reforms that have been brought into place over the last two years, it really has stabilized the marketplace,” Caissie reported.

“Rates on the auto side have gone down, on average, in the vicinity of 30% in the past two years overall. We implemented the cap and that really, really helped the auto situation here in New Brunswick.”

Caissie said the local association is “closely monitoring how things are going with the reforms that were brought into place.” For the brokers and brokerages, it’s been a learning curve to adjust to the reforms.

Market capacity in the province is not a problem, Caissie observed. “With the stabilization of the auto product here in New Brunswick, that has brought much more capacity than we had three or four years ago,” he said. “Companies have come back into the market; some that had pulled out of certain regions have gone back in. That has eased some of the capacity issues that we’ve had.”

Caissie predicted rate increases for the commercial lines at some unspecified point in the future. “Commercial has been soft here in New Brunswick for the last year and a half,” he said. “It’s been extremely soft.

“Can it get any softer? Personally, based on what I’m hearing, I think it will level off.”

Caissie didn’t want to speculate on when commercial rate increases might happen. But “hopefully the pendulum won’t swing [back towards a hard market] as far as it did the last time,” he said. “Stability would be such a nice thing.”

NOVA SCOTIA

In the Nova Scotia market, the market is stable and rates are definitely trending downwards, Andrew Walker, the Insurance Brokers Association of Nova Scotia president, said.

“The market is softening,” he said. “That’s straight across the board. That’s auto, property, personal and commercial and liability.”

In auto insurance, Nova Scotia introduced Bill 1 in 2003 that limited soft-tissue injury claims payments to a $2,500 cap. “That legislation appears to be working,” Walker said. “Insurers are happy with the results and rates are being driven down.”

Availability issues that existed before the cap appear to have evaporated. “We did have some serious issues here prior to late fall of ’03, and we have just continued to improve steadily since that period,” he said. “We certainly do not have an availability issue in the province here [now]. We’re getting the re sults out of the competitive market that the competitive market should provide.”

One issue that is a concern to Nova Scotia brokers is the rapid return of soft market conditions in the povince. “I think the market may be softening too quickly, especially on the commercial side,” said Walker.

Brokers and insurers alike need to keep in mind how losses affect current rates, Walker said. In contrast, insurers should resist the urge in a softening market to gobble up as much market share in an area as possible.

“I would like to see this [softening market] progress slowly,” Walker said. “I would like to see insurers actively monitor results and not begin to take huge decreases in premium. I would rather see a steady-as-she-goes type of approach.

“I think any consumer’s going to go ‘Wow’ if they see a 30% or 40% decrease over what they had on their last policy renewal. But I think it’s important to understand that, looking at past trends, usually the faster that that happens, the more quickly that comes to an end [and hard market conditions return].”