Behind the ‘Battle Royale’ for D&O and cyber accounts
In the Hunger Games by Suzanne Collins, two adolescents from each of 12 poverty-stricken districts are selected to compete in an annual, televised deadly pageant.
Canadian P&C insurance brokers liken the plot of the Hunger Games to the fierce competition in Canadian commercial specialty lines. Armed with surplus capacity, insurers are fighting for business in all commercial specialty lines, most notably in directors and officers (D&O) and cyber.
The number of companies requiring D&O insurance in Canada “is pretty much well known,” says Catherine Lanctôt, national leader of the financial services group at Aon Canada. “There are no new headquarters popping up in Canada. And there are no crazy transactions we were experiencing in 2020-21, during the whole SPAC [special purpose acquisition companies], De-SPAC [the process after a SPAC has located a target company and is ready to go public], and IPO [Initial Public Offering] era.
“So, the size of the [D&O] pie is not growing. But there are more and more partners that want a slice of that pie. I like to…call it Hunger Games.”
Similarly, in cyber insurance specialty lines, expanding capacity has led to rate decreases — or, at least, slower increases — for companies seeking cyber coverage.
“We have very buyer-friendly market conditions in the cyber space right now,” reports Katie Andruchow, senior vice president and national cyber broking practice leader at Aon Canada. “They’re much friendlier conditions than we’ve seen in the last four years, probably.
“There are lots of options for clients out there, regardless of the industry they’re in, regardless of their size, and sometimes regardless of control profile…we’re cautioning our clients that not all those options are equal.”
Growing capacity
After four years of commercial specialty lines hardening, the industry’s mustered sizeable capacity to chase new business. But where’s it coming from?
First, the profitability of Canada’s P&C industry has reached historic highs over the past three years — an 18% return on equity (ROE) in 2021 Q3, 13.3% in 2022 Q3, and 11.5% in 2023 Q3. All are above the historical industry average ROE of 10.1%
“Many insurance companies, with very few exceptions, had spectacular results,” as one source quipped. “Whoever didn’t make money in the past two or three years shouldn’t be in this business, to be honest.”
Meanwhile, Lloyd’s of London became Canada’s second-largest insurance supplier by market share in 2023, per MSA Research data published in Canadian Underwriter’s 2024 Stats Guide. Last year, Lloyd’s reported a 2023 profit of roughly C$10.3 billion, as opposed to a C$4.5 billion profit in 2022. And the market’s combined ratio fell to 84% in 2023, compared to 91.9% in 2022.
This Lloyd’s profit “has already started trickling into Canada and causing some capacity flux in the market,” says Jamal Madbak, vice president of commercial lines at Echelon Insurance.
As well, the number of Canadian managing general agents (MGAs) is expanding, as reported by A.M. Best. MGAs have been described as ‘outsourced underwriters.’ They are regulated as brokers, but carriers give them limited authority to underwrite niche lines for which it would otherwise be difficult to find capacity.
A.M. Best late last year estimated there are more than 80 MGAs in Canada, with between $3.5 billion and $4 billion of premium flowing through them — approximately 10% of written premium in the country.
“We’re seeing a lot of MGAs crop up,” says Andruchow. “They’ve got different capacity supporters on the back end.”
Whether these niche MGAs can withstand tough market conditions in cyber is a matter for debate, she notes.
“They…don’t necessarily have the breadth across lines of business they write to be able to withstand adverse cyber market conditions and support it with other, profitable lines of business, which I think a lot of insurers don’t think about when they’re making a decision about what option they should pursue for their insurance support.”
And then there are new entrants.
“Guilty as charged here, Aviva being one of them,” says Andrew Cadogan, underwriting manager of management liability at Aviva Canada. “We are taking a look at our overall portfolios and recognizing we do need to have a management liability suite.
“We’ve entered the market, as have some other companies. And we’ve got Bermuda [i.e. reinsurance capacity] back in the market.”
Subscription accounts, in which multiple insurers agree to offer capacity for a portion of the same risk, flourished during the hard market but don’t explain the capacity increase. But they do limit insurers’ exposure to large commercial account losses, creating more flexibility to employ capacity elsewhere.
“Maybe everyone [after COVID-19] recognizes it’s better to share accounts, to subscribe accounts, because those days when those bigger companies used to put 100% on accounts — like $1 billion capacity or $500 million capacity — have gone,” says Madbak. “From that point on, the past two years have seen some stabilization [of loss experiences].”
Consequently, “new business was coming in,” Madbak concludes. “There were no major rate reductions on our book rates, as such. Our renewals were going on standard, maybe a 5% increase here and there. Some good accounts can get away with as-is renewals.”
Echelon’s rate experience is on par with how the industry’s commercial renewal rates have gone thus far in 2024, as Applied Systems reports.
“Overall, the magnitude of rate increases [in 2024 Q2] was down across all [commercial] lines relative to average premium renewals in the same quarter last year with 5.83% in 2024 Q2, compared to 7.44% in 2023 Q2. All lines of business saw decreases compared to the same quarter last year.”
D&O and cyber insurance are two bellwether specialty lines exemplifying the changing market cycle in commercial lines right now, sources tell CU.
This article is excerpted from one appearing in the August-September 2024 print edition of Canadian Underwriter. Feature image courtesy of iStock.com/Lorado
