Market Profits Up

Welcome to Risky Business Commercial Insurance with Butler Byers. This is Paul Martin, your host, and joining me today, Colin Rooke, Commercial Risk Reduction Specialist with Butler Byers, and Colin, we’re end of Q1 here in 2022. And that’s always the time for me when I look back, it’s kind of the time we start to get the economic assessments, the financial performance of last year, and at year end, you get 90 days kind of to do up the book. So what are we finding? And what did 2021 bring to the insurance industry? This has been kind of a rocky ride for the last four or five years. And what did last year do? Was it more bad or did they turn the corner?

Yeah, so basically now, the summary of the last year, the results are in on how the Canadian insurance industry fared, and 2021 had the lowest combined ratio ever recorded, and by a significant margin. Basically meaning, all the money they took in, minus expenses, what’s left over, and it also translates into the third most profitable year for the industry, also ever recorded, and since 1975. And so again, from a loss perspective, the industry’s improving.

Now, I want to be very clear about something. So claims are still through the roof. So, for anyone saying, “Oh, okay, so there’s no more claims.” No, no, it’s as worse as it’s ever been. So our previous show about claims, I mean, that’s all true. But we’ve been talking about this hard market that we’ve been in for four or five years, and certainly in the last three big impacts of that, it shows that the rate correction, the limiting exposure, increasing deductibles, reducing capital, reducing coverage, removing coverage lines all together, is working.

Now, it’s not across all lines of business, this combined ratio. I mean, the combined ratio is representative of all lines of business. But depending on the line of business, the combined ratio is in the fifties, meaning if… Let’s say it’s 50- 50, that means 50% was available for profit. And so, there is a lot of classes that are performing very, very well, but those are some of the classes that had the largest corrections, because they needed it. And so, it’s sort of… its good news and it’s not at the same time, meaning they’re right. They needed more rate and that’s working. They needed to reduce some coverages, making insurance more difficult to get, but the result is working, and for the great companies out there, or those willing to put in the work, this will be great news for you.

I think that’s the point here, isn’t it, is that, we can’t… business owners can’t take that sort of position that, “Oh, well, the insurance industry’s back, they had a good year, so I don’t have to perform, I don’t have to be as good a customer as I used to be.” I guess we could put it that way is just say, Colin’s been pounding on me to do the work, do the work, do the work, and now the pressure’s off. That’s not the story here at all, is it?

No, it’s not. So this cycle, this hard market is also, as far as what I can find, the longest ever recorded, meaning it just took that long to get to where the rates needed to be. I mean, some of these hardening of markets or hard markets, are 18 months, not four to five years. And again, we’re not out of the water depending on coverage line, like Cyber, we’re just getting into it. I mean, I think we’re going to see three to five more years of Cyber increases due to the rise in claims. So the insurance industry, they’re not going to forget where they came anytime soon. And that’s why I said, “It’s sort of good news, bad news.” I think they are going to continue to take a very hard stance on less desirable business.

We had a meeting earlier in the week with, I’ll say the one of the top three largest insurers in Canada, just so I don’t deliberately single them out. But they now have, in their reporting back to us, they now have new criteria. So when we submit a quote, they’ll say, we either received it, quoted, declined. They track hit ratio and they report back to us so we know how we’re doing with these markets. Well, they also have expanded their list of why they decline, and just to give us some more specific info, and there’s a lot of items, line items now, basically around quality of risk. And it just basically means, this client isn’t even good enough for us to consider it, and so therefore we won’t, we’re not going to waste our time. We took a quick look and they can be someone else’s problem, which that didn’t exist before. You know, they would say, “Oh, metal manufacturer, that’s a hit for us. We’re going to underwrite it.” Now they’re saying, “Metal manufacturer. We’re all over it, crappy business, no way.”

And so they’re not going to forget where they’ve come anytime soon. However, from what we’re seeing, all these insurers, their appetite now is increasing for new business. And so, it’s a great sign for the great businesses out there. And it’s a great call to action for those that haven’t really been working on it. You know, you can stay in that mix. I mean, if you like the hard market, if you like 20% increases year over year and decreased coverages in a huge headache at renewal, you don’t probably have to do much. Or, you can sort of switch sides, say, “There’s a benefit to me if I work on risk,” and certainly from an insurance cost perspective, but an overall in company performance.

Well, you always like to think, “What lessons did we learn through this process?” So if I’m an insurance company, I learned that, “Yes, I have to manage my book of business more diligently than I had before. So I have to be more discerning, more discriminating, charge more and just run my book much more efficiently.” From the customer’s perspective, I think we’ve learned that those who did the job well, as you advised, now have options. They managed to keep their coverage through, probably got pretty good premium treatment relative to the market, and now are in a position to be wooed away with perhaps better rates or more coverage, or just better treatment. But if you were in the also ran category, if I could put it that way as a customer, you still don’t have any more choices. Right? Just, the market’s improving. Yes. Insurance companies are more interested, but they’re still discriminating. They only want only… the only trades are going to happen among the best players.

Yeah, absolutely. In fact, the light came on when you were speaking there. So something I’ve never, I don’t think I’ve ever really clarified on this show, so everyone was affected by the hard market. We didn’t see a lot of as-is renewals or decreases. And we’ve talked about, “Do you want to be the one that getting the 5% increase versus the 50?” But I want to be clear about something, too. So, if you were a great business before the hard market, I mean, your rate would be severely deviated from average, and certainly from above average, or someone with high severity and frequency of claims. And so, despite increases, what I’m talking about is, you could be in the same category, but there could be a 60% rate spread. And yeah, I mean, if I’m seeing 4% and you’re seeing 4% or 15 or 20% increases, we have clients that still, after the hard market, are way below the norm because of the work they’re putting in, and then even now, those clients have more choices despite an industry floor rate.

And being completely transparent, I mean, I think every broker could relate to this that, when you’re dealing with your clients and you get a renewal and you see the rates or the rating, there’s that moment where you say, “This looks, I mean, this looks reasonable, for that company.” And we’ll say, “I don’t think we should… I think we should take this. I don’t think we should re-market it. I don’t think we should push back.” But again, it doesn’t mean that you are paying the lowest rate in the industry, it means, “Well, taking a look at the operations, this is fair. I’m not… I’m certainly not going to… I’m certainly… what case can I make?”

And so, if you are on, the point of all this is, if you are on the wrong side of the point I’ve just made, there is a huge opportunity to gain ground. I mean, an absolute… I mean, just a great opportunity to say, “I get it. And I don’t want to be in the top end.” And ask your broker and say, “Okay, where do I fit on the average rating for my class of business? Where do I fall?” And then really think about that. Especially if you’re a big deviation from average. What are you going to do just to get to normal? And so, big opportunity now to say, “You know what? I’ve seen my insurance premiums triple in the last year. I would like it to start going the other way.” But they’re not going to adjust that if you haven’t changed, but you do have competitors that are paying better rates than you, absolutely.

And that makes you less competitive. Listen, we’ve got to take a break here, Colin, and we kind of run a little bit over time. So we’ll pick this up. You’re listening to Colin Rooke, commercial risk reduction specialist with Butler Byers. This is Risky Business back after this break.

Welcome back to Risky Business Commercial Insurance with Butler Byers. Paul Martin, here, your host, and joining me for a conversation today, Colin Rooke, Commercial Risk Reduction Specialist with Butler Byers. And Colin, before the break, you were talking about on the insurance companies have kind of weathered the storm and kind of back now, they’re starting to, think we talked earlier, they had four or five years of losses and they had to refill their treasuries. And that always is a scary thing in a macro context, too. Did we lose, did the world lose any insurance companies through that? Did they all make it? I mean, are they… is the industry back if I could put it that way?

Yeah. So the world has lost insurers. There’s been a lot of consolidation. And again, I wouldn’t necessarily say they’re back. I mean, they’re certainly not back. 2021, fantastic year. However, it’s a drop in the bucket over the last, well, certainly five years of horrible returns. But it just shows that it’s moving in the right direction, and for those insurers that have fared very well, and there have been some that were early on the correct rates, that are… that have… they’re way ahead of this and already decreasing in some areas or as-is renewals, which is a fantastic term as a broker, as-is, I don’t have to make any adjustments, I can just… you know, that’s great news for us. And so, there are insurers in Canada that came out early. Again, one of them being the top three.

I mean, I remember a meeting, it was seven years ago and they said, “We are concerned that this pricing scheme cannot continue. And we are taking a hard stance and we are going to start increasing rate year over year, and we’re prepared to lose business doing it. But when the market correction ultimately does occur, we want to be well ahead of that, and then come out strong.” And you know, that insurance company is doing very well right now because they are able to offer deep discounts. But, I do want to caution that it doesn’t mean they’re going to start dropping rates to the floor, but it does show it is working and that this can continue, and despite having a great year, they’re not going to plan for this. Meaning, it’s almost too good. And so, we will see companies saying, “Well, if I take a less stringent stance on certain lines of business, we might be able to gobble up a lot more premium.” And so, we will start to see that very soon. Already have in some cases.

Well, I think at the end of the day, all of… and we talked to business people here, this is about commercial insurance. I mean, everybody that will be interested in this topic and listening to us, understands sort of where I was going with that question was, none of us benefit from big, large chunks of an industry disappearing. I mean, if insurance companies provide us with a service of supply us as suppliers, we want more options, not fewer, as customers, and that they are actually financially healthy, it’s probably a pretty good sign for us. And we know how this works. Customers have to carry the weight… the freight on this thing. And so the conversation that we’re having is really about, “Dear customer, here’s how you perform better in order to get preferred pricing in what has been, and will continue to be a challenging market.”

Yeah. You know, it’s another good point about just the insurance company overall. So there has been consolidations and the problem is, those are Canadian domicile markets, like domestic markets being purchased up. So every time that happens, I mean, you’re going to lose their, their niche, their specialty. And then you’re more likely to have to go to a Lloyds of London, and you want to avoid that. I mean, if you can place business with a Canadian domicile insurance company, I mean, you’re ahead of the game in most cases. And the only reason why I say most cases is, sometimes they just won’t write it in Canada. But so, the concern there is, and if the industry can’t keep this up, we’re going to have less choices. And you’re right, that doesn’t work well for anyone.

And another comment too, is there seems to be a large kind of spread in the middle now. So we’ve got a handful of giants in Canada and then the middle is kind of vanishing, and then you move over to more of the mutuals. Now there’s a lot of fantastic mutuals out there. However, traditionally the box is quite small. They can’t really push the limit, and the middle is where you get all those niche players, that says, “Well, we have a program for this. We have special… We have expertise in this.” As those go away, it doesn’t necessarily say that program remains. They just bought the premium, bought the clients, and really there’s no requirement to continue. And we’ve certainly seen that, one in particular where they insure a lot of municipalities, rural schools across Canada, is purchased and now no longer able to write new business as a result.

Well, that’s the point, isn’t it? I mean, if I’m big and sort of specialized or generalized in my realm, if I buy a boutique firm, I’m going to make it look like me, I’m not going to look like that. Right? I bought it for a reason, it was available for a reason. And so, those sort of unique or distinct benefits that you had maybe enjoying, disappear pretty quickly, and you as a buyer have very little leverage when it comes to that. And Colin, we’ve got maybe a half a minute left. I’m just curious now, when you start talking to your customers going forward, how do you position this thing? And it’s just, “We need to do more of the same. This has worked, we got through the rough patch. And this is when we’re really going to benefit?”

Yeah. We’ve got to explain that, again, it’s not the clients, it’s the insurance… their stance on rate has worked. Now we can keep it up and they can… we can do nothing and continue these high levels, or we can push back. We can put in the effort and really sell your story. And again, especially if you are on the losing end of average, put in the work now. I mean, you are a reason why we got to this place.

Colin, as always, very interesting. Thank you for joining us. You’ve been listening to Colin Rooke, Commercial Risk Reduction Specialist with Butler Byers. I’m Paul Martin. Thanks for joining us. This is Risky Business. Talk to you next time.