The President of Economical Insurance suggests that the commercial insurance marketplace in Canada will likely be firming to a hard market over the next couple of years. The hardening market has been heading this way for several years before the coronavirus pandemic exacerbated economic trends that were already well underway.
The pandemic has caused a huge tide of disruption to the global economy with most countries injecting unprecedented amounts of fiscal stimulus with accommodating monetary policy, resulting in very low interest rates.
Insurers rely heavily on underwriting returns and investment income to remain in the black. Pricing models now have to account for this, which results in higher pricing for insurance products, reduction in risk appetite/capacity and possible exit from certain lines of insurance.
Moving forward in a pandemic influenced economic downturn, there may be reduction in premium income due to bankruptcies or reduction in coverages. Insurers need to implement strategic reviews with action plans to address these issues in order to remain financially capable.
Some insurance industry segments may still see these problems difficult to manage and opt for opportunities to merge or sell. M&A (merger and acquisition) activity is increasing as the Covid19 crisis deepens. There is increased brokerage consolidation across Canada with brokerages selling to the various brokerage consolidators.
Insurer consolidation is again gaining interest across the world as larger more profitable insurers look to acquire insurance companies that are in weaker financial situations. Recently, a purchase offer was made to RSA Insurance Group for its world-wide operations. A consortium of Intact Financial and Danish Insurer Tryg, presented a premium offer of purchase. It is widely expected to be accepted by the RSA Group board with expectations of a formal bid at the end of November. If the bid is accepted and the sale goes through, Intact will take over RSA business in Canada and the UK.
This will make Intact the largest insurer in Canada and may force similar consolidation with other insurers. As a result, there may again be reductions in the number of insurers in Canada and less competition causing greater premium increases and reduced options for the insurance buyer.
This may be an opportunity for mutual insurers, who offer alternative insurance purchase options than the stock insurers, to grow their commercial and personal lines business. Mutual insurers have less profit requirements than stock insurers and without any shareholders looking for significant investment returns.
However, some mutuals may need greater capitalization to manage in this low interest, reduced premium environment. With the need for additional operational investments and technology, some mutuals may look to amalgamation in order to better handle the difficult times ahead.