June 2004 NEWSLETTER to clients of Knox Insurance Brokers Ltd. From Randy Bushey, A.I.I.C., General Manager	Close newsletter
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TOPIC: Observations on Market Cycles

As your broker, part of my role is to be your observer relative to trends in the Property and Casualty Insurance marketplace. Our business is given to wide swings in pricing, bouncing back and forth between:

• a "hard" market where capacity is limited and pricing increases dramatically, and

• a "soft" market characterized by aggressive competition where pricing decreases and underwriting standards are relaxed.

As you know, the "hard" market of the past few years has impacted everyone with more restrictive coverage, the demand by insurers for much more information in the risk assessment phase, and significantly increased premiums. Many have simplistically concluded that 9/11 was the sole driving factor. Although this terrorist event will eventually cause the withdrawal of approximately US$40 billion from the world-wide insurance web of insurers and reinsurers, other significant trends have contributed:

• continuing global litigation relating to asbestosis.
  
  
• unfavourable natural disasters, particularly in more populated regions (including 5 losses in North America in 2003 alone, each surpassing US$1 billion.
  
  
• numerous moves by international financial agencies to downgrade the financial strength ratings of some of the world’s largest and most respected property-casualty insurers and reinsurers, causing stakeholders to demand better profitability results.
  
• The deterioration of the global equities markets, including the bond market yielding significantly lower interest rates than maturing bonds. As investment revenue declines, underwriting income must take its place.

However, in North America, much of the "hard" market is behind us. Some have rushed to the conclusion that therefore the "soft" market is here. I do not share that conclusion for the following reasons:

• automobile insurance is the single largest property-casualty line in Canada, and it continues to be unprofitable throughout most of the country.

• on occasion we are seeing an underwriter act very aggressively; however, this appears to be a "one-off" action, quickly terminated by senior managers determined to maintain their tenuous hold on profitability. In other words, there is no evidence of a "soft" market trend.
  
  
• large global reinsurers continue to maintain a firm influence on most pricing.

You will hear in the media that the Canadian property-casualty insurers are achieving profitability. Although the headlines appear to suggest extreme profitability, we at Knox are not yet convinced that in general, the industry represents a great investment: the industry return on equity (ROE) for 2003 was 11.3%, but was only 1.7% for 2002, and less than 8% for the years 1994 to 2003.

You can appreciate that reasonably sustained profitability is important to your financial security, as the financial failure of an insurer hurts those who have paid premiums without the benefit of protection, and severely cripples those insureds subsequently having claims. The Canadian property casualty industry together made approximately C$900 million in the first quarter of 2004; this can only work in our favour in negotiating your renewal terms, and engaging in pricing discussions with other insurers, where prudent.

As your broker, we are your "eyes and ears" in this changing sector. We are committed to watching the trends, interpreting them accurately, and bringing value-added advice to you.