Why the hard market and COVID-19 shifted brokers’ focus

Commercial lines in Canada have changed in the aftermath of the pandemic.

These days the monolithic ‘hard market’ has evolved into multiple markets differentiated by segmented pricing and best-in-class loss-control measures.

And the commercial broker’s role has changed accordingly. After helping Canadian businesses navigate a longstanding hard market and noting that carriers have an appetite for insuring ‘best-in-class’ commercial risks, brokers are now advising clients on how to control their losses.

To that end, they’re pursuing innovative ways to mitigate risk without necessarily transferring those risks to an insurance policy. And they’ve now completed the shift to becoming more holistic risk advisors to their clients.

Insurance underwriters are increasingly employing advanced data analytics to pick out the wheat from the chaff among commercial accounts, even within commercial lines experiencing so-called ‘pricing corrections.’

These hard market cycles, as they are otherwise known, typically feature higher pricing, higher deductibles, restricted terms and conditions, and less capacity.

Shifting with the market

Canada saw hard market conditions even before the pandemic. In 2018, the P&C industry suffered an underwriting loss of $419 million, which plummeted to an underwriting loss of $756 million during the first quarter of the pandemic.

In 2019 Q1, “just 63.2% of insurers that competed in the marketplace reported profits, the lowest level of insurer profitability since 1990,” Grant Kelly, vice president of financial analysis and regulatory affairs at the Property and Casualty Insurance Compensation Corporation (PACICC), observed in the June 2020 issue of PACCIC’s quarterly report, Solvency Matters.

The P&C industry’s return on equity (ROE) in 2019 Q1 was a paltry 2.4%.

Claims costs triggered the losses. For example, in 2019, the year before the pandemic, federally regulated insurers reported a loss ratio — net incurred losses divided by net earned premium — of 66.9% in commercial auto, 65.9% in commercial property and 66.5% in all liability lines, including standard commercial general liability (CGL) and specialty.

Contrast that to 2022, when claims ratios in all commercial standard lines were down substantially. Insurers reported loss ratios of 51.2% in commercial auto, 50.4% in commercial property and 25.6% in all commercial liability lines.

“At the end of the day, insurance premiums are really driven by losses,” said Ilan Serman, president of Ontario for Gallagher Canada. “When losses are more frequent, and when losses are more severe, the premiums go up. I don’t want to make it sound too simple, but it is almost that simple.

“When we look at cycles and rate trends, it’s important to look at what’s underlying the cause of those losses. And then to say, ‘Is that cause likely to persist? Is it likely to mitigate or is it going to accelerate?’ And so that’s how I like to look at these trends.”

Before the pandemic, commercial underwriters adjusted their pricing models to account for the larger losses, leading to a hard market cycle that’s lasted about four years.

That led to historic highs in P&C market profitability in 2021, featuring a 15% ROE in commercial lines and an industry-wide underwriting profit of $10.6 billion. While industry profitability fell somewhat in 2022, the industry still turned in a net underwriting profit of $8.4 billion last year.

Given carriers have had this long period of correcting their pricing models, one broker told Canadian Underwriter, “if they’re not in a position where they’re confident with what they’re looking at right now, then they haven’t done their job.”

Marc Major, managing director at Marsh Canada, has observed more competitiveness in standard commercial insurance lines right now (property, auto and basic CGL policies).

“I won’t say the commercial market is soft and you’re getting reductions,” he said. “However, because insurers are comfortable with where their models are at with certain types of risks, they are now allowed to say: ‘I can compete on this account. Now I feel confident I’m at the right technical level that I can provide a 2% increase instead of a 15% increase.’”

This story is excerpted from one that appeared in the May print edition of Canadian Underwriter. Feature image by iStock.com/alexander uhrin