Why brokers need to keep clients covered when the economy slips

Most economists are still calling for some degree of economic downturn later in 2023. That makes the road ahead uncertain for commercial companies, and many can be expected to seek ways to tighten their belts.

For some, cost-cutting measures may include their insurance spend. So, Canadian P&C insurance professionals must be vigilant to make sure policyholders are insured to value, not just insured for what they can pay, experts told Canadian Underwriter.

Canada’s economy grew by 0.5% in January 2023, the last month for which Statistics Canada has complete data. And the agency’s flash estimate for February calls for 0.3% growth. The most recent quarterly data from 2022 Q4, released in late February, found real GDP unchanged (0.0%) after five consecutive quarters of growth.

Forecasters expect Canada to see little economic improvement this year and the Conference Board of Canada predicts at least one quarter of negative economic growth during 2023. Plus, a report by RSM Canada projects a GDP decline to just under 1% in 2023, before rising again to 2% in 2024.

Such circumstances bring the broker value proposition of advocacy, choice and advice into focus because it falls to them to help clients understand the consequences of making cost-based decisions during a stalled economy.

“[Clients] are interested in reducing costs, but I’m not convinced they understand what it actually costs from a risk perspective to be making those decisions,” said Mark Wiens, head of commercial insurance for NFP in Canada.

“We’ve heard clients say, ‘I’m not worried about [dropping that coverage] because it’ll never happen.’ And then you get that regrettable phone call three months later, when it does happen, and [clients] are disappointed with the claims experience. You’ll hear comments like, ‘Well, why didn’t you talk me out of this?’ or ‘How come you didn’t explain this better?’”

Brokers must make clients aware of better coverage options, even if those clients are focused solely on saving money.

“Some [brokers] have a hard time walking into hard conversations,” said Wiens. “We should be looking to be a business partner with and educate our commercial clients. I think we’re doing them a disservice by just simply accepting that they want higher deductibles or accepting that they want to delete certain coverage(s).

“We want to take our relationship with our clients to a place where…we can speak freely and challenge them on some of their thinking,” he says. “Does it get uncomfortable at times? Absolutely, it does. But that’s the value we as brokers can provide to our clients.”

It’s a prudent approach, particularly as a brokerage’s errors and omissions (E&O) exposure typically increases during periods when clients are looking for ways to roll back coverage.

“As clients cut back their coverage in whatever way — that might be an increase in deductibles, not buying the top layers of liability — is there the likelihood that there’s an uninsured loss?” asked Ilan Serman, regional president of Ontario at Gallagher. “Yes, that does increase. And is there a possibility that ends up as an E&O [loss] to insurance brokers? Absolutely, yes.”

At best, a broker could lose a client who made discretionary changes to their policy resulting in an uninsured loss. At worst, brokers could face a lawsuit from a client who felt misguided during tough times.

One broker told Canadian Underwriter of a time when they almost lost a client who was unhappy with their coverage options during a recession. “In a previous recession, I nearly lost a client because [the client] was no longer covered under the options they chose at a previous renewal. They [faced] exposures for which they had been covered before.”

This scenario affirms the importance of having a well-documented client file.

“Thankfully, I had put it all in writing to them so that I could share it with the clients and say, ‘Well, here’s where I laid out the options for you and I explained the reductions in coverage for those options.’”

This article is excerpted from one that appeared in the April print edition of Canadian Underwriter. Feature image courtesy of iStock.com/panida wijitpanya