By Stan Sauerwein
After last year's catastrophic losses and the elevator ride on premium pricing that followed in 2004, a random poll of companies suggests insurers expect 2005 will be a modest growth year. In the least, they think the industry can anticipate the status quo unless softening markets prompt a premium-cutting market share melee in commercial lines.
While the companies polled were reluctant to provide specifics, it appears combined ratios for 2004 should come in below 100% across the board.
Tom Reikman, vice-president personal insurance for the Economical Insurance Group says his company has been "building on the improvements we saw in 2003."
"We expected The Group to grow throughout Canada. In B.C., we expect we will continue to grow rapidly."
Harry Kloosterhuis, president of Family Insurance Solutions Inc., is a bit more cautious about the 2004 results. "Barring any adverse changes to excess loss claims that are out of our control, as ICBC can hold on to these until the last moment, and hoping we do not have a rash of bad weather claims, we will have a combined of just less than 100%," in 2004, he predicts.
Kloosterhuis expects to see some major growth in 2005, however. "We are anticipating a controlled growth of 10-15%," he says, adding a variable. "Again, this depends much on the strategies of our company competitors and ICBC."
Andre Stephanian, regional vice-president B.C. at Optimum West Insurance Company echoes Reikman. Optimum has had a good year, he admits, and is "expecting conservative growth" in the year ahead.
The same is apparently the case at Sovereign. According to Doug Edward, assistant vice-president and branch manager in Vancouver, while Sovereign General Insurance expects a combined ratio less than 95% in 2004, he doesn't anticipate growth at the same pace next year.
"Modest growth, and that is considering the lack of real rate increases," he says.
"Much of the growth that all the companies have seen over the last couple of years is in rate increases, I think. We don't really think that is going to happen next year. There will be some rate increases but not what we've seen in the past."
"I believe most property accounts are more or less adequately priced. There are some exceptions and I expect there will be some accounts that need to be increased." When it comes to commercial, Edward says he has recently been shocked at the level of commercial reconstruction costs.
He says that on a recent trip to Victoria, he learned that a frame two-storey office building of only 1,500 sq. ft. per floor cost $600,000 to rebuild. "That's $200 a sq. ft. for an office building! It probably included the interior walls and that sort of thing, but even so," it was an eye opener for him. "I think we need to have a close review of the RCT on a regular basis."
Other than increased costs affecting premium rates, he believes a price adequacy has been more or less achieved in personal lines. Commercial lines need some further improvement, in his opinion. "Liability still needs increases but we're finding it's becoming more difficult to achieve this with the market softening."
Edward thinks the move from a hard to a soft market is the biggest challenge the industry will have to face in B.C. next year.
"It's affecting the commercial market much more so than personal lines. There may be some companies that are looking for an increase in their market share and when that happens they start paying extra commission. The big challenge will be to work our way through that and not allow it to go too far south because if we do, we'll find ourselves back in the same old predicament very quickly."
"We've all worked so hard to do the right thing and get the pricing turned around and then to just go and start chopping away at it, and in big gobs like we're hearing about in some of the large accounts, really makes you wonder what these people are thinking about."
Reikman sees some softening on the horizon for both commercial and personal lines, "however I think the industry is more aware of the risks involved in perpetuating a return to unprofitable underwriting conditions such as those from only a few years ago. Moving forward, the industry will likely take a more tempered approach to pricing and underwriting instead of the cyclical swings we've seen."
Stephanian also believes "the property rates are closer to reality than liability rates, that seem to have more room for increase."
"The market has already softened in commercial lines," he says. "We do not foresee any further softening that would influence the market significantly."
Edward's experience lately is a little different. "The large premium accounts seem to be the ones that are under pressure right now," he says. "We just lost a $100,000 account, for premium that the broker told us is at least 30% less than what we charge. That's from a national broker and we weren't even given the opportunity to quote on it."
"I can tell you we are not going to be increasing our base rates on personal lines next year," says Edward. "Insurance to value of course is going to affect premiums, so we are going to see more of that next year. Most brokers, I suspect, are in the process of redoing the evaluators on all their dwellings, but to do it all in one year is almost impossible for some of the brokers. Rates will be up on some dwellings but only because of the new evaluations."
For the Economical Insurance Group, with a volume split about 67% personal lines and 33% commercial, Reikman also thinks price adequacy has moved closer to what it should be, but with some qualification. "On the underwriting side, the industry in B.C. must continue to work towards ensuring property is insured to value. We need to continue to work with independent brokers to ensure policyholders are educated about the true replacement cost of homes," Reikman says.
"Under-insurance is still one of the areas that need improvement. The use of RCT has solved the issue to a certain degree. However, the output value is as reliable as the input values and many users skip important steps while using RCT," Stephanian suggests. "We are far from having solved the problem."
At Family, Kloosterhuis thinks there is still a way to go on price adequacy. "I don't think the industry has ensured there is rate adequacy yet in relations to property values, as they continue to be undervalued," he says flatly. "Insurance to value is still not correct and it will take several more years to educate all consumers about the true cost of total replacement of a lost home."
"I am concerned people will look at one year's results, like the possibility of improved results in 2004, and make decisions to slow needed price increases or even start dropping prices. This will just perpetuate the rate inadequacy we've seen in recent years. The health of the industry is a long term treatment, not based on one or two years."
Terri Johnson, vice-president BC with Gore Mutual Insurance Company, doesn't want to jinx results making predictions about combined ratio for 2004, and she is not prepared to make a call on rate adequacy either. It is a question that is going to become more and more difficult to answer in B.C., she thinks.
"Probably the thing that will most affect us is this giant ball called the 2010 Olympics that is rolling down on us. It is one of those 'be careful what you wish for' situations. I think it will be a very good thing for the province but it will create some challenges in the insurance industry. We're already seeing difficulty getting skilled trades here. I think that's going to have an impact on claims costs and that will mean it will become increasingly difficult to say whether the price is right."
"In the last year we've seen some pretty substantial changes in claims costs and my crystal ball going forward says that is more likely to get worse than better," she says.
There don't appear to be many new threats on the industry horizon, although at the 40,000-foot strategic planning level, companies have their eyes on a few new issues.
Reikman says over-regulation, especially in auto lines, is a rising threat for the industry. He also thinks the potential for claims costs to rise at a faster pace than premiums is an issue the industry has to observe closely. Aligned with that, he believes, is the issue of consumer relations "and the need to enhance communication with policyholders regarding market conditions, reasons for rate/underwriting action, (and the fact) profit must occur in this industry in order to ensure companies remain in the market."
Stephanian thinks the key issue in BC is the future of ICBC. "Once we have a clear idea of the direction, we might see major changes in many ways."
Kloosterhuis concurs about ICBC's future being an issue to watch closely. "I don't mind fair competition. I think the biggest threat for us in BC is the fact that since ICBC controls most of the auto business and we cannot obtain proper pricing analysis, we cannot price our auto product properly. With more information sharing a more level field would help companies charge the right price for the right product."
Edward also thinks there may be a looming threat regarding commission and CPC disclosure. "I don't see it as a real serious thing mind you, but it is something that we're currently facing and I know there are discussions going on in Ontario about just how far we're going to have to go in disclosing just what we pay. Every company has different commission deals for brokers that might be giving them a lot of profitable business. There are all sorts of deals out there and every company has them. No one is going to disclose all that."
"I think we have some issues that are unique to B.C.," says Johnson. "I think the inability to come into this business new on the brokering side is a challenge," for the future. "The value of autoplan licenses is a big barrier to entry. I think that's a concern. It's certainly a concern from an insurer's point-of-view. The brokers are getting fewer and larger and there are some attendant issues around that (situation)."
All those things considered, and based on candid company feedback, brokers should be able to look forward to calm seas in 2005. Knocking on wood is, of course, a wise extra precaution.
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