What’s on Dec? | Episode 7 | Measuring up

AM Best delivers a broad overview of the Canadian P&C market, taking a hard look at the property and auto insurance sectors.

In our seventh What’s on Dec? podcast, AM Best senior director Greg Williams will look at what the ratings agency sees behind the numbers in property and auto. He’ll look at the challenges facing the Canadian P&C industry generally and compare the Canadian industry’s performance against that of its global counterparts. Also, will the wildfires and flooding change the credit ratings of Canadian P&C insurers? Finally, how are Canada’s P&C insurers coping with the increasingly complex regulatory environment? Hear Greg discuss these topics and more!

Audio transcript

Intro: You’re listening to What’s On Dec?, the Canadian Underwriter podcast, focusing on the hottest topics in the P&C community, featuring insights, analysis, and interviews with subject matter experts throughout the year.

Pete Tessier:

Hey, everyone. Welcome back to What’s On Dec?, and you should know that this podcast is brought to you by Taycon Risk, the MGA that specializes in niche markets, hard to place or unusually complex risk. They’re now announcing their digital rating underwriter management system to make it easier for you to drum up more business.

Hey, Curt, we’ve got someone really cool on today, and that’s Greg Williams, the senior director at AM Best, and Greg’s going to talk a little bit about how they serve the Canadian marketplace when it comes to insurance and data but also a little bit about the upcoming Canadian marketplace briefing. And he’s got some pretty interesting takes on where the marketplace sits in Canada.

Curt Wyatt:

Hey, there isn’t many people in our industry that doesn’t know AM Best. It’s just a name that rolls off the tongue, you say it all the time. This is exciting to get someone from an organization that has a huge influence over our industry. When we talk to our clients, we talk to underwriters, when claims are being adjusted, it’s a major part of the insurance world, and here it is on What’s On Dec?

Pete Tessier:

Yeah. With Greg, what we really see is someone who has such an incredible bird’s eye view of the industry, particularly in all the ways it sort of expands out from companies to distribution to claims and to adjusting. He shared some really interesting stuff and also just a little bit about how important the perception of strength in a financial institution is and how they measure that. Greg shared some really cool ideas.

Curt Wyatt:

He goes into the weeds. At the same time, he leaves you wanting to hear what’s in that report in October. These guys, they’re publishing more. They’re producing more content for the industry, and I think it’s a win. It’s a win for everybody who’s trying to understand better what’s going on going into, like we talk about, the Cat concerns, and are there problems that could arise from potentially not seeing claims get paid? These questions get asked and answered on today’s What’s On Dec?

Pete Tessier:

Yeah, it’s time to bring Greg in and get live with him. Greg, thanks for coming on, and welcome to What’s On Dec?, the Canadian Underwriter podcast.

Greg Williams:

Yeah, thanks for having me.

Curt Wyatt:

This is exciting to get you on, just growing up in the industry, I mean, we always had the little AM Best book on the corner of our desk. It just seemed like it was a bit of a bible to insurance, right? And to learn more about what you do for our industry, I think, is just so important in this day and age of big data. With the world wide web and digital, you guys can get stuff out so much quicker and better than in the past. And I know in October you have something coming out. It’s the Canadian Market Briefing. What really can you tell our listeners of what that report talks about and why it’s important that the industry reads this report?

Greg Williams: 

Yeah, the insurance industry can expect to learn that despite numerous headwinds currently facing the Canadian industry, most carriers remain wel-capitalized to navigate through these challenges. I think both P&C and life insurance companies are emphasizing strict underwriting and risk selection, and that’s really resulted in continued favourable underwriting results despite numerous headwinds. The industry will also hear about the unprecedented Cat events that are facing the industry and what’s being done to curb some of these unsustainable losses. And then finally, readers of the report will learn how Canadian insurance companies have taken really a proactive approach in the implementation of IFRS 17, and they look to be well positioned at the start of the adoption.

In addition to the report that’s going to be made available, AM Best senior analysts and industry leaders will present their analysis and insights on the state of the Canadian insurance market on Friday, October 6th. That’s going to be held in Toronto. It’s a free event, so I’d encourage your listeners to sign up for it on ambest.com.

The discussion topics will include our outlooks on the Canadian insurance market, we’ll also discuss recent developments on the delegated underwriting authority enterprise front. So think MGAs, MGUs. We’ll talk about the implications of IFRS 17. And then, finally a session will be devoted to cyber and the rise of AI technology.

Pete Tessier:

Greg, looking at some of the data that’s come out and everything that you see, when it comes to the Canadian insurance marketplace, as a rater and having all these input points, are you seeing any specific challenges for the Canadian marketplace with what AM Best has gathered?

Greg Williams:

Yeah, without a doubt. I think one of the main challenges we’re seeing is the elevated frequency and severity of Cat losses that have impacted the industry. And it’s not only Canada. I mean, you look at it, it’s worldwide at this point.

But these Cat losses not only impact the insurer’s bottom line, but also the ability to purchase the adequate reinsurance coverage going forward at a reasonable price. So as reinsurance renewals have become more difficult, some companies are dealing with these challenges by either reducing their appetite or their capacity for these type of risks.

Additionally, what we’re seeing is the elevated inflation that’s really driving loss cost trends higher. And in response, many insurers are currently raising rates. Supply chain issues and labour shortages still continue to plague the industry. And finally, carriers have also had to navigate through an extremely volatile investment market driven by the elevated interest rate environment.

Curt Wyatt:

Greg, you mentioned earlier that within the scope of the data you’ve collected that there’s this change between, potentially, I’m assuming it’s a change, you mentioned MGAs and MGUs and just now you talked about insurers and some of the costs they’re facing. Are you seeing some data shift that points to why we’re seeing this growth in MGA and MGU activity within the Canadian marketplace?

Greg Williams:

Sure. Yeah, it’s an interesting dynamic with the MGA, MGU marketplace today. So if you think back 10 years ago, since then, premiums worldwide through MGAs have nearly doubled. We’ve seen really explosive growth in the U.S., some explosive growth in Europe, in Australia, and we’re starting to see that growth in Canada. And it really just speaks to the specialty natures of these MGAs.

And so what we’ve seen is maybe some of the talent from the primary insurance companies migrate over to the MGA, MGUs space, and in response to that, AM Best continues to monitor insurance companies financials and how that business that MGAs are producing impacts the insurance companies.

But last year, we introduced at AM Best what we call performance assessments for DUAEs, or delegated underwriting authority enterprises. And what we do is perform assessments on the MGAs. There’s five different categories that we take a look at, and we come out to an overall score.

Pete Tessier:

Greg, right now, this summer in particular in Canada, we’re having all sorts of challenges with climate related issues. Half the country’s on fire. We’ve had flooding in other parts of the country. These are things that insurance companies are taking more and more responsibility for in their coverages, particularly in the last 10 years, the expansion of flood coverage, overland water coverage into the consumer P&C marketplace. What does this mean for companies when they consider Cat loss and how AM Best looks at them when it comes to their rating?

Greg Williams:

Yeah, I think, as you mentioned, there’s been no doubt that Cat losses and Cat events have seen a shift over the last five, ten years. We’ve seen the significant increase in severity and frequency. These events are becoming more volatile. It’s becoming more difficult to prepare against and control the losses. As you mentioned, the wildfires we’ve seen in the Maritime provinces, which really have historically haven’t had much exposure. We see hurricanes going up towards Nova Scotia. We’ve seen flood and severe convective storm events really increase across the board.

So to your question, from a rating perspective, we haven’t seen any downgrades specifically due to Cat events in the Canadian marketplace. The carriers continue to maintain strong balance sheets, and they’ve been able to withstand the capital erosion that has occurred with these Cat events.

I think it’s important to note how we capture that. So when we do a rating on companies that are exposed to natural Cats, we incorporate a capital risk charge for potential catastrophes in our capital model. So we’re capturing the potential for that in our rating before it happens. We also conduct Cat-related stress tests on top of that. And again, it’s just getting to the fact that we understand that these companies are exposed, and there are potential for Cat events. And given if these Cat events happen, will the company be able to withstand it from a capital perspective? And then, as I said, to this point, we really hadn’t seen any downgrades.

Now looking forward, sure, if there’s continued Cat activity, if that continues to take place, it certainly has the potential to impact a company’s ability to pay claims if these losses continue or if they’re wider in scope or more frequent than contemplated in our rating models. Again, but carriers will need to ensure that they have proper aggregation management protocols in place in addition to the reinsurance coverage, again, to assist with the balance sheet volatility.

Curt Wyatt:

And Greg, do you find that the Canadian regulatory environment, because you’re looking at all countries, but would you say in particular the Canadian government and the way we run insurance as a country helps that system remain as good as it is?

You just described something that I think to a lot of listeners will be very interesting, that we think that things are worse, right? Because we see the news, we see what’s happening, but yet you’re saying that these insurers in Canada are actually holding up pretty good to the fact that we are having these larger losses and things aren’t perfect. Is that a little bit to do with the fact that our regulator does a better job than maybe, potentially, other countries? Or is this just what organizations need to do now to remain viable in their market? Don’t wait for the regulator to tell me what to do. I need to make sure I step up my balance sheet.

Greg Williams: 

Yeah, I think it’s a little bit of both, to be quite honest with you. I think, again, when companies enter the rating process, they do so voluntarily. So they have the, probably, infrastructure in place, the enterprise risk management in place to address some of the issues that you talked about, maybe creating a buffer around some Cat events. But with that being said, we do view OSFI as a strong regulator, and that certainly helps in terms of the overall ratings of the Canadian companies.

Pete Tessier:

So let’s get in a little bit about what AM Best does, how you serve the insurance industry. I think the brand name is known, but you do a lot more than just simply rating. It’s a very big organization with diverse tentacles into all aspects of things. But specifically, how are you serving the insurance industry right now?

Greg Williams:

Yeah, thanks. AM Best’s mission is really to provide accurate, timely, comprehensive information on the creditworthiness of insurance companies and the performance of related parties in the insurance industry. And really, to fulfill that mission, AM Best’s credit rating services assesses the creditworthiness of and/or reports on over 16,000 insurance companies worldwide, including here in Canada. Our credit ratings provide our opinion of an insurance company’s ability to pay claims, debts, and other financial obligations in a timely manner.

So then AM Best Information Services then integrates those credit ratings with insurance news, financial data, and thought leadership to help consumers and professionals make more informed personal and business decisions. Our customers include a wide variety of stakeholders, including agents, brokers, investors, regulators, educators, and policyholders interested in measuring and managing insurance-related risk.

Pete Tessier:

Greg, just want to wrap up here and say thanks so much for jumping on What’s On Dec? with us. Super informative stuff, and thank you again for sharing a little bit about what AM Best is up to, and also that you do have the one-day event in Toronto, which I believe you said was October 5th?

Greg Williams:

October 6th. It’s Friday.

Pete Tessier:

Okay. On the Friday, October 6th. Everyone check that out. Great informative opportunity to learn more a little bit about what AM Best is contributing back into the insurance marketplace.

Greg, thanks again. We’re happy to have you on, and have yourself a great day.

Greg Williams: 

Great. Thanks, guys. I appreciate it.

Pete Tessier:

Okay. That was amazing from Greg, and Curt, I’ve got a whole host of questions here, but I think the first one I really want to sort of get into, or maybe the idea I want to get into, is the interconnectivity of what AM Best is looking at. Did you know they were doing voluntary work with MGAs on their rating and fiscal responsibility?

Curt Wyatt: 

No, absolutely not, Pete. And I think that when you see that an organization like this is keeping the industry in check, that it talks to you as an industry person around how important private organizations, not always relying on the regulator, not thinking that there’s somebody else that’s going to step in and fix a problem, that we have private companies that are doing this and doing it for the benefit of everybody.

Pete Tessier:

And I think the interesting part was when we asked a little bit about the Cat stuff, Greg was really forthcoming in and almost assuring people that these companies, these insurance companies in Canada, are doing a really good job of managing their exposures.

And he even talked about their reporting being voluntary. So when you see an AM Best report, and you’ve got your insurance company on there, you’re looking at your insurance company partners and you’re trying to understand all the pressures going on, you know that these companies are voluntarily giving up that information because they want to show that they are on top of the situation. They want to show that their reserves are good. They want to show the marketplace that they’re keeping a good eye on their business.

And I think that was very interesting because I do think when you look into other areas of the insurance marketplace, there is not a week that goes by that you don’t read of insurers pulling out of certain regions. Now, that’s not necessarily the case in Canada. There are restrictions that happen when Cat events are on, but there is no one abandoning a province. There’s no one abandoning things. And I think Greg really assures the marketplace that with what they see, these companies, all of them are being managed well, and he gets into a little bit of the importance of the compliance with OSFI.

Curt Wyatt:

For sure. And if anything, this is good news because what we’re going to hear in the near future is that capacity is increasing in Canada, that the world is looking at the Canadian insurance marketplace as favourable. It has challenges, but what areas don’t have challenges, Pete?

And I think that the message today is something that we should take as: going forward into 2024, things are good. We’re going to keep plugging away here. We’re going to keep fixing things that are offside slightly when it comes to potentially rating and underwriting. So there’s always those challenges. Hey, it’s not blue skies every day, right, Pete? But for the most part, it’s positive news for the Canadian marketplace.

Pete Tessier:

Yeah, and if you’re looking for more news, remember that event with AM Best in Toronto in early October. Think about participating with them and signing up. Not trying to endorse them, but there’s a lot of great information there, as you heard from Greg. And I think it’s important if you’re interested in the underside of the industry, what’s really going on behind the scenes from the service model, to see how these companies are functioning, see how your industry is functioning. It’s a great opportunity to learn some more with that Canadian Market Briefing that’s coming out in October. So hey, everyone, thanks again for listening to What’s On Dec? We’ll see you soon.

Outro:  Thanks for listening to What’s On Dec?, the Canadian Underwriter podcast.