Don’t believe the hype: Why the hard market is softening

Canada’s P&C insurance industry is showing signs of market softening despite the many reasons for a hard market to persist, according to a June 2023 Marketplace Insights report from Lloyd Sadd, a Navacord brokerage.

The report cites many reasons industry observers have predicted a hard market to endure through 2023, including ongoing economic and political instability, supply chain disruption, labour shortages, regulatory changes, record-high reinsurance rates and the threat of increasing global catastrophe losses.

However, despite the gloomy forecasts, increased capacity and “robust insurer appetite for risk” have boosted competition in 2023, and that’s expected to continue into the second half of the year, Navacord reports.

“Even as some insurers initially seek rate increases between 7% and 15%, they’ve been forced to settle on marginal increases of 5%, and often even flatten or discount rates to remain competitive in most categories,” says the Lloyd Sadd report. “The insurance company’s fear of losing clients to competitors is back.”

Who are these competitors?

For one, Lloyd’s syndicates and other opportunistic international insurers have re-emerged to expand their offerings in Canada, Navacord observes. “This is contributing to innovation in the market and putting pressure on legacy insurers to up their game.”

In addition, active managing general agents (MGAs) have opened up capacity, even in some highly specialized areas, forcing established insurers to hold the line on rates, Navacord observes.

“Traditionally, MGAs were the go-to markets for risks perceived as out of the box,” the Navacord report states. “They picked up a lot of otherwise uncoveted risks such as restaurants, hairdressers, nail salons, and cosmetics.

“MGAs have done a great job at showing the industry these are essentially low-risk business sectors and they’ve demonstrated how to insure these risks. As a result, we’re seeing more options and competitive pricing across the board in these markets.”

Related: Brokers still worry about the hard market, but what’s next?

In B.C., the province’s switch to a no-fault auto insurance regime has lowered auto liability claims, thus opening up an appetite to write business in other areas of liability, such as hospitality, Navacord observes.

“Recent legislative changes in British Columbia to no-fault auto [have] contributed to a reduction in litigation that habitually came with auto claims liability in the province,” the Navacord report states. “Liability is now several, rather than joint and several. We’re finding insurers more open to underwriting certain classes of business they may not have touched previously.

“Historically, claims against restaurants have been higher than other classes of business because of host liquor liability in B.C. For restaurateurs who’d been in business fewer than three years, the transient nature of staff and other factors meant traditional insurers would not touch them. If they did, many stayed away from clients with liquor exposures representing anything over 25% of revenue.

“With the new legislation, more carriers are getting in the game, evaluating the risk as healthy, and willing to go up to 60% liquor exposure, which is unprecedented.”

Also, brokers working with large-sized carriers in the construction sector can expect to see some loosening of terms on wrap-up liability, Navacord predicts.

There are generally two kinds of wrap-up insurance policies:

Contractor-controlled wrap-up liability insurance is purchased by the general contractor leading the project, and it extends protection to all contractors and subcontractors hired to work on the project.
An owner-controlled wrap-up liability policy covers all the contractors involved in a construction project, but it is bought by the owner of the property instead of the contractor.

“We don’t anticipate rates [for wrap-up policies] will decrease much, but increases are expected to be marginal this year,” Navacord reports. “Insurers are taking a more conservative approach, but they’re still looking to generate some top-line growth.”

Feature image courtesy of iStock.com/akinbostanci