The Property/Casualty Insurance Market – Soft!
The insurance buyer is in charge again! It happens when economies falter and there’s no question that the Canadian economy is stalled badly. Gross domestic product is growing at under 1%, productivity is falling and, most disturbing, the engine of our economic prosperity is rooted in the world of small business. The number of small businesses that are closing currently exceeds the number of new businesses being registered, many of which are self incorporations intended to lessen tax burdens by allowing more writing off of expenses. The only economic ”expansion”, if we can call it that, is coming from government and a few large corporations. In a country where growth is well below inflation, the signs of trouble are very obvious. Creativity, motivation, regulation and job prospects for young starters are weak and frustratingly absent.
Insurance companies are, and this has always been a bit mystifying, almost exclusively focused on their “top line” growth. Where the economy fails to contribute to that growth, with robust expansion, the insurance equation soon falls prey to the continuing growth of claims which inevitably catch up to premiums accumulated over time. The collection of more premiums, in advance of claims, is a top priority to insurance managers because, in economic hard times, claims usage by policy holders trends up as premium income slows down. And yet, true to form, and in line with past economic declines, insurance companies start to cut premiums in order to encourage more business to come through the front door. Ultimately, of course, those short term “discounts” which hopefully help keep premium sales growing by attracting new business, as one insurer is taking business away from another (someone has to lose in this kind of struggle), become a serious drag on profitability as it becomes clear that the strategy didn’t work. Ultimately, a bit down the road, there’s a snap back reaction and a sudden return to what we refer to as a “hard market” where the insurers boost rates significantly to make up for lost premiums. Forced and discounted sales strategies, in a desperate attempt to continue growing sales, always fails the “bottom line” and eventually penalizes the business.
For the buyer, of course, the lowering of rates is a welcome relief, at a time when the economy is disappointing. But this relief is never permanent, as the claims graph always continues from a combination of inflation, increased regulation, expanding legal activity and broadening coverages. These realities are in total contradiction to rate cuts that can, in many cases, be significant. Insurance buyers should enjoy the brief interlude of premium relief, always temporary, but be totally cognizant that the benefit will be short lived and that reality will return to an insurance market that functions on the past and perpetually looks over its shoulder to see what obligations are coming at it. Insurance can never be priced like a commodity, with fixed costs, it forever must adjust to the demands made on it going forward. Unless policy holders are prepared to discount their claims demands, premium discounts will face a quick and sharp demise.
Andreas Schwartze, MBA, CIP
