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“You cannot control when an insurance marketplace hardens”

- Simon J. Fenn CIP, Chairman Fenn & Fenn Insurance Practice Inc.

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As an introduction in 2018 the global insurance industry started to correct its approach to business following about 13 years of soft (competitive) marketplace conditions and the worst year in the history of insurance (2017) for insured claims in the area of US$135Bn+ For 13 years the insurance marketplace had been fiercely competitive, in fact it became too competitive almost irresponsibly so.

So, for 13 years the public generally received fair (lower) insurance premiums. I should add that it’s best when looking at insurance costs to look at an entire insurance cycle of soft (buyer’s market) market conditions, that typically run 8-10 years, (this most recent one was 13 years approximately) and hard (insurer controlled market) conditions, usually a shorter cycle of two to four years. The current “hard” insurance marketplace is likely to continue through 2021 and one cannot reasonably predict today what will happen in 2022 until the 2021 year’s performance (losses: premiums and return on investment (ROI)) is better known.      

Manuel DaCosta: Recently, media reports horrible stories of people having insurance policies cancelled or not renewed without explanation. What are the main conditions driving this approach to business?

Simon Fenn: Thankfully on our watch we are not seeing this on our own retail book of business.  We are however working today on several new business files submitted to us by other retail brokers where coverage has lapsed. Sometimes this relates to mis-management of the insurance process. For example, an insurance buyer or broker that thinks it can submit updated renewal information less than 30 days from renewal date in this type of hard marketplace potentially faces this situation. Insurance professionals need to keep their customers informed about change, it’s best to tell your client than not to tell them about impending change that may heavily impact a business’ budget.

You cannot control when-canada-mileniostadium
Simon J. Fenn CIP, Chairman Fenn & Fenn Insurance Practice Inc.

A unique underlying issue in this marketplace is that many insurance professionals started in the insurance industry after 2005 and have never witnessed a change in the insurance cycle from soft to hard conditions, they are inexperienced and have found themselves as surprised as their customers when quotes have not been received in time, or prices have increased incrementally. Many insurance veterans (baby boomers like me) that have experienced a hard insurance market, have now retired, except me and just a few others. I am one of the fortunate ones (or unfortunate depending on perspective) to have seen a few insurance market swings in my career, the worst being in my opinion, 1984, which was my training ground as a broker, following six years of underwriting. We try our hardest to keep our customers informed but sometimes, even when doing the right thing, it’s still deemed our fault as the messenger when prices go up and coverage becomes less available.

How to avoid being caught without coverage?  If you have not heard from your insurance professional be proactive, check in with your insurance professional three, even four months ahead of your renewing policy, ask them what their expectations are? If they say they need your information as early as possible to achieve quotes prior to renewal, take them seriously. If they ask for much more information than you have ever had to supply, give it to them.  If they don’t seem aware there is a marketplace change happening or seem to think you can improve on your renewal premium, ask if there is someone in the organization that has at least 20 years experience.  If not, you may wish to seek advice from a more experienced insurance professional.  Many of my own clients used to think we were mad asking for insurance details up to 120 days ahead of renewal, today they fully understand my motivation was in their best interests.  I am among the more fortunate to have clients that have remained with me since I started my business in 2003.

MS: Many suggest that fraud in the insurance industry, particularly auto is driving costs upwards. How is fraud allowed to continue to drive the auto industry and why can’t it be controlled? What are the biggest issues driving fraudulent claims?

SF: Fraud has existed in insurance for many years. It is not just the automobile industry that is experiencing it. Certainly, staged accidents have been attempted by many in order to defraud insurers for bogus vehicle accident injuries. But people will intentionally try and defraud insurers as they know there is a deep pool of cash behind every insurer. People also set up fake insurance companies to defraud the public; also, they act as insurance brokers but are not truly licensed.  Fraud has been around for centuries and all industries are targeted by fraudsters, a perfect example today are cyber-hackers, an element of the global population that uses the internet to defraud business and the public. The insurance industry works with the police and even Interpol to track fraudsters, it happens every day somewhere in the world, probably many times a day. Think about those bogus phone calls you get saying it’s the CRA and you’re going to be arrested unless you pay up. The Insurance Bureau of Canada (IBC) “issues fraud alerts to inform consumers about scams…..If you suspect fraud, immediately contact your insurer, the IBC Tips Line at 1-877-IBC-TIPS or the Canadian Ant-Fraud Centre at 1-888-495-8501.” If you suspect your insurance broker has committed fraud contact the Registered Insurance Brokers of Ontario (RIBO) at 416-365-1900 or 1-800-265-3097.  http://www.ibc.ca/on/resources/media-centre/fraud-alerts

In closing on this matter, to avoid it happening at all to you, ask your insurance broker to show you their license or search the broker’s license on the RIBO website at https://www.ribo.com/ .  You can also check to see if the insurance company exists by searching  https://www.osfi-bsif.gc.ca/Eng/Pages/default.aspx or for Ontario licensed insurers the FSRA formerly FSCO at http://www.fsco.gov.on.ca/en/insurance/pages/industry.aspx. Being defrauded by a fake insurance broker or insurer can be avoided, just check their credentials before giving any information to them. In fact being defrauded by anyone can be avoided, just be suspicious and always verify credentials if uncertain.

MS: ln construction, insurance and bonding requirements are becoming very restrictive. Why?

SF: The shortest and most complicated question to answer. Firstly, due to the insurance hard marketplace as explained above there are fewer insurers offering construction insurance. Many higher risk classes of the construction industry have seen their insurers withdraw from offering coverage driving costs up as the demand increases. Many insurers in a hard marketplace focus on renewing their existing customers and decline to consider submissions from insurance professionals for new business customers seeking improved coverage or pricing. When the insurance marketplace hardens, it does so to correct its portfolio and make it profitable once again. The focus is on returning to profit, by writing business at sustainable rates and potentially less coverage or lower limits of insurance.  The new business insurance client is generally shopping their insurance to achieve lower prices, so insurers are in no rush to entertain new business submissions in this marketplace. If they do entertain those submissions the “insurance shopper” may be surprised at how expensive their alternatives have become and may find that the incumbent insurer doesn’t looks so bad after all. The whole exercise is more likely to be a waste of time in a hard insurance marketplace.

Covid-19 and the current recession are also having an impact. The financial stability of those in the construction industry is being closely monitored by the contract surety industry.  Surety is not insurance, it never intends to have a bond called due to a project failure arising from contractor default or financial failure. The Surety guarantees a contractor is qualified financially to complete a project. If the contractor defaults and the bond is called to complete the project, the surety expects to be fully indemnified by the contractor or personally by the individuals that own(ed) the contracting business. If their credit/financial stability shows signs of faltering, which they constantly monitor, access to bonds may become an issue. Many businesses have been extremely impacted by Covid-19 as well as the recession that has taken effect during this tragedy.

I should add that those in the construction industry today also need to monitor the financial stability of the business owners for which they work.  Financial failure in today’s marketplace is equally as possible by both construction project owners as well as contractors or every tier.

MS: There appears to be substantial amalgamation in the insurance business. Does this contribute to insurance companies being more selective with whom they deal with?

SF: As mergers and acquisitions take place in the insurance industry the marketplace, while still the same size from a “capital” perspective, is actually smaller from a “insurer selection” perspective. When Aviva Canada became Aviva many years ago now, at least four insurance companies became one insurer. As a broker in the construction sector this was disheartening as our selection of construction insurers for our clientele shrank from four available markets to literally one overnight. Insurance market amalgamation, withdrawal and retraction (the latter two whether permanent or temporary) all potentially increase the demand curve bringing about increased costs. As fewer insurers are available, yes, insurers can become more selective or may even entirely change their business “appetite” by declining business classes that some of the merged/amalgamated companies may have welcomed before.

MS: What should companies be implementing within their organizations to ensure insurance companies don’t raise premiums unreasonably or refused to renew policies?

SF: This question is an essay in itself. I will try and summarize with some suggestions:

1. Take “more skin in the game” – consider your maximum pain threshold as a business, what you can afford to lose.  Increase your deductibles or self-insured retentions to this higher amount removing your insurer further from first dollar loss.

2.     Assess the risks your business is exposed to, insurable and non-insurable risks.  Assign stakeholders in your business that understand the risks. Identify them, quantify them, treat them (come up with means and methods to ensure you don’t sustain them negatively) and if these fail, re-visit those means and methods to improve on them until you no longer sustain them.

Take responsibility for your risks, don’t just say “that’s what I bought insurance for”.  If you are risk aggressive, willing to sustain more risk yourselves as a business, you are a better partner for an insurer that is in business to keep you in business following a major loss event. If you keep deductibles low and your insurer pays two or three small claims a year, eventually that insurer will choose not to renew your business.  If you shop every year to get a cheaper insurance price, eventually the insurance industry will stop quoting you. Control your risks and you will control your insurance costs.

Note I mentioned non-insurable risks too, insurers don’t cover “everything under the sun”, speak to your counsellors: your lawyers; accountants and insurance professionals to gain a better understanding of what in your business is non-insurable and put a shroud of precautions around those non-insured exposures such as commodity cost fluctuations or loss of market.

Set up contingency plans in the event insurable and non-insurable events take place. The key is to stay in business under the worst possible circumstances. If you have contingency plans even the impact on your insurer will be lower, if the loss is insurable.  If your measures have reduced an insurers exposure to loss, that insurer will be more likely to renew you at a reasonable cost.  

Only you know your business the best, your advisers can guide you but you need to step back, look at your business and establish how best to protect your business as if insurance was not available at all.  Put those measures in place, then determine how much insurance you need.

Make sure you have the right insurance adviser. Ask questions, find out what they know about your type of business. If they don’t seem to understand your business, consider finding one that does, so you will be better represented.

Unfortunately you cannot control when an insurance marketplace hardens and even the very best risk managed businesses, still see some increase in costs at time of market change. However, those risk managed companies should see a lower financial impact than companies that “throw caution to the wind.”

MS: The changes in attitudes by insurance companies appear to be drastic and have come suddenly. Is this the result of the current pandemic or due to previous market conditions?

SF: There is no question that like your business, the insurance industry has had to adapt to Covid-19. Some brokers and insurers have hundreds of employees and now have offices sitting empty as workers operate remotely. Even our own office, a relatively small one, was reduced to two of us for over two months and still today we only have six people in the office, that’s about a third of our full force.

The “attitude” is mostly to do with insurance marketplace change, which was happening well before Covid hit. It is interesting the reference to “attitude” as I often call a hard market a marketplace “character” change. In the 2001 Hard insurance marketplace I recall referring to it as a marketplace with “teeth”.  Unfortunately a change from soft (buyer’s) market to hard (insurer controlled) market is often sudden, sometimes even we as brokers don’t see it coming until it is upon us, crystal balls are not in our arsenal. All I can say is there are still human beings behind the scenes but the insurers have to be allowed to return to profitable results, in order to return the public to reasonable insurance market conditions. There is a saying that “drastic times call for drastic measures”, at the end of every soft insurance market cycle when rates are at their lowest or investment return at its poorest, there is often some catastrophic incident or incidents that bring about the need for change in the insurance industry. Insurance rates are often found to be too low at the time that these catastrophic events take place.   

“This too shall change” and I can assure you (I hope after 42 years of employment in this industry), a sense of “normal” will return, at least for another 8+ years and then the madness will very likely begin again. Hopefully long after I retire.

MS: Please provide an overview of a forecast of what the industry may be like in the next year and what we should look for.

SF: I don’t have good news to share, I feel like Dr. Gloom. I believe this hard marketplace has “legs” and will remain with us for the duration of 2021. So, “batten down the hatches me mateys”, the storm will continue at least for another year in my honest opinion.   

Remember, you cannot measure whether you have been treated fairly or poorly by the insurance industry over a one-year period. It’s best to review the entire soft and hard insurance cycle of 10-15 years and average out your insurance costs.  Your temporary insanity from this marketplace will be on the mend as most of you will find that the average cost looks a lot better over the entire insurance cycle, than the cost of one year. The soft market is generally around two thirds longer than the hard market so your average will (or should) always be lower than what you pay during a shorter hard market.

Manuel DaCosta/MS

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