What’s on Dec? | Episode 9 | Personal lines trends

She’ll also discuss how to help consumers with the rising cost of insurance and whether consumers have enough choice in the insurance marketplace.

Are personal lines in a hard or soft market cycle? Will parametric solutions help deal with Cat losses?

Listen as Susan discusses these topics and more!

Audio transcript

Intro: You’re listening to What’s On Dec?, the Canadian Underwriter podcast, focusing on the hottest topics in the P&C community, featuring insights, analysis and interviews with subject matter experts throughout the year.

Pete Tessier:

Hey everyone. Welcome back to another episode of What’s On Dec?, the Canadian Underwriter podcast, which is brought to you by Taycon Risk. They’re the MGA that specializes in niche markets, hard to place or unusually complex commercial risk. They turn hard risk into smart coverage the old-fashioned way – they underwrite it. Check out DRUM, their digital rating underwriting manager for your automated submissions. Bang the DRUM with Taycon on at taycon.ca.

Hey Curt, great episode today because we’re talking with Susan Penwarden, who is the managing director of personal lines for Aviva. And personal lines is that class of business that we talk about it a lot, it has widespread losses, but when it comes to doing business, so much is focused on more complex risk, right?

Curt Wyatt:

Absolutely, Pete. I think there isn’t a broker out there that hasn’t started or cut their teeth doing personal lines. I mean, let’s face it, it’s what everyone learns and it’s where every customer starts to learn about insurance at a young age as well.

Pete Tessier:

Yeah, and we recorded this episode back in the summer, so you’re going to hear a little bit of some references to some of the climate going on back at that time, but none of the issues have changed. Susan is going to share a little bit about some of the nuances that are coming in with Cat losses, talks a lot about auto theft and what’s happening there, and of course, Curt, inflation.

Curt Wyatt:

Let’s cut to Susan. She’s got a lot to share and everyone enjoy the show.

Pete Tessier:

So let’s welcome Susan Penwarden, who is the managing director of personal lines for Aviva Canada to What’s On Dec? And Susan, thanks for joining us. Let’s get into a little bit about some of these crazy trends and things that we’re seeing with personal lines right now in the Canadian market.

Susan Penwarden:

I’m happy to be here. Thank you for having me.

Pete Tessier:

Let’s talk about claims. This is a big one, right? Claims trends are driving a lot of the things in the industry when it comes to personal lines both in auto and property, what kind of trends are you seeing then it comes to claims?

Susan Penwarden:

If we start with auto first, the big trends we are seeing is definitely a continuation of inflation and supply chain constrictions. All of those things are pushing up claims cost. At the same time, now that we’re coming out of COVID, we’re seeing a return to what we would call more normal levels of frequency of claim because people are out driving to work and doing other things. So the activity is going up and that’s definitely driving us back towards more normal trends if you want to look at it that way for auto.

But the final piece that we’re really seeing in the industry is, I might call it almost an explosion of theft claims, particularly in the GTA area, in Toronto, but we already had a trend elsewhere, but that’s really picked up in the last 12 months I would say. All insurers are noticing it for sure. It’s definitely we’re seeing it too, and it’s the high-value vehicles, and they’re being taken off people’s driveways and other things. And they’re appearing overseas in a port, in a container basically, so they seem to be being stolen in order to be resold.

If we were to switch to property, well we already know, I don’t know about you, but today we’re having a smoke day here in Toronto again, so a poor air quality day and we are seeing more Cat events, more frequent Cat events that are affecting more people and that is one trend we’re seeing in personal lines where just maybe they’re not as big, but unless you count Fiona last year, but certainly more frequent and more people being impacted. So it’s how do we respond to that as personal lines insurers.

And the other piece we’re seeing is just on the property side, it’s again costs are continuing to rise. I think the inflationary impacts there have peaked a little bit. We’re not seeing the same dramatic trajectory that we were seeing maybe 12 months ago, but it continues to be elevated cost and the other thing is finding people to do the repairs and getting the material to do the repairs. And where that’s hitting us is time to do the work, both to get the estimates and then to actually deliver for our customers. And we are starting to see some customer complaints coming at us because it’s taking us longer to deliver than traditionally we would’ve done in the past.

Pete Tessier:

I think the organized crime side of things when it comes to auto is a very well known issue right now and we’re seeing it in a lot of the major centres across Canada, Toronto being the big one. But obviously we’re seeing a lot of things that are driving loss ratios and companies and the industry are taking them very seriously. Are personal lines driving some of the loss ratios right now? And if so, how can that be improved?

Susan Penwarden:

I would say right now certainly auto is having quite a heavy impact just generally speaking on commercial. So a company’s results for sure, and you’re seeing a lot of focus on that in terms of looking to get better rates, but also do all the things around theft for example, lots of companies are working with theft prevention techniques, whether it’s Tag devices or locks or other things, trying to find some ways to actually help their customers mitigate some of those potential threats. Fraud and theft are closely connected, so there is industry work trying to address some of these systemic issues and also obviously raise it with regulators and government to say, “Look, we need to work together on some of these things because they are driving up cost for our customers.”

Pete Tessier:

So when you look at the market, what kind of cycle are we in right now, Susan? Is this something that is hard, is it soft or is it something else? Are we in a transitory cycle when it comes to things like rates and capacity with personal lines, whether it be auto or personal property? Where do you see the market sitting right now?

Susan Penwarden:

I would say at the moment it’s still relatively firm in terms of its cycle. Now we all know that that only lasts a certain amount of time and then eventually it kind of starts to cascade back into something a bit softer. But I would say right at the moment, the combination of what I’ve just described on both the property and auto dynamics in terms of pure claims cost is driving more firmness in the market on both sides than you might otherwise have seen. I think the dynamics coming out of COVID, return to normal activities, and there’s just inflation continuing and the bank is worried about it too from their perspective because it’s meaning that our economy’s running hot, things continue to go up in terms of cost. So it’s a bit of a… Everybody’s trying to manage it, but it means that you are seeing a firm market because insurance companies’ margins are definitely being squeezed as a general comment, I would say.

Pete Tessier:

Susan, you mentioned having a smoke day and we all know the challenges we’re having as an industry and as a country with climate change and some of the losses that we have with Cat. How are they driving rates? And one of the things I’m really curious about is does Aviva see parametric solutions helping with the personal lines segment when it comes to dealing with certain types of losses that may align with Cat losses and the cost associated with them?

Susan Penwarden:

Well, certainly Cat as an issue is becoming more important and a bigger portion of the costs of claims in personal property, for example, maybe a little less in auto, but certainly in personal property. I think what you are seeing is that industry is starting to work more closely with government on things like flood mitigation and also potentially pooling some of the higher risk flood exposures that came out in the last government budget to start looking at that seriously. So there are things happening to try and manage those costs, but they are certainly impacting us in terms of how we’re seeing performance and it is coming out in our pricing.

The other aspect that is having an impact is of course reinsurers. It’s quite fascinating – if you go back to say 2012 and look at the Cat volatility in the Canadian market, we were considered actually quite a benign sort of market. You’d want to have Cat exposure, you were kind of offset what you were seeing in the U.S., but after 2012, the trends have totally changed and the number and frequency and severity of Cats has continued to go every year up since 2012. And there has to be some link to climate change because these are what we call secondary perils, which are linked to weather or climate in some way, shape or form, whether it’s fires, whether it’s the derecho we had last year or some of the atmospheric river events that we’ve seen out west. All of those are connected to climate change and we’re seeing more of them.

So reinsurers are now saying, “Canada isn’t quite such a benign environment when it comes to Cat.” So they have started to push their pricing up to us, reflecting the amount of losses that they’re seeing, and also they’ve chosen to increase their net retention. So they are moving up, if you like, in terms of exposure that they’re willing to accept.

What does that mean? It means the Canadian market generally has to absorb those costs, some of which they’ll absorb, some which may get passed on to customers, and also means that we are managing more volatility in our own portfolios to a certain extent. And that means we have to think about how we manage that book of business, how do we understand where those perils are, how are we ensuring them, how are we pricing them, and how are we looking at the accumulation across the various bits of our portfolio to try and manage all of that and keep it in balance?

What I would say is I don’t think you’re seeing anybody withdrawing from something at the moment. I absolutely don’t think that’s what’s happening. I think what you’re seeing is underwriting companies trying to get more sophisticated about how they manage it, understand the exposure and price for it. So there’s more differentiation depending on the risk, where it is or what it’s exposed to, then you might’ve seen in the past, and that’s going to continue because that’s how we need to manage this.

In terms of parametrics, interesting question. At the moment, Aviva is working on a pilot with small business customers looking at sort of a trigger around number of days of rain, et cetera. And so far, it’s still in a pilot phase. If, depending on how that one works out and whether it’s of interest to customers, because the idea is if it exceeds a certain threshold, you get a payment, right? So, it’s not connected to anything other than the event itself. If that works out, we may look at whether that would help an individual customer. But at this point we haven’t tried to launch parametrics beyond that. Where you see parametrics playing out generally is reinsurers offering that protection to insurance companies for big events. So, it’s another kind of protection against my Cat exceeds a certain level and then there’s a payment on a certain type of Cat, whatever that peril might be. So, there are some reinsurers that offer that kind of protection. It’s still relatively specialized, so we’ll see how it goes with our pilot and if it works for commercial, hey, maybe we’ll try it in personal lines as well.

Pete Tessier:

What has Aviva done to address the concerns of consumers on inflation and the way the broker channel has worked with it, in terms of dealing with possible under-insurance and the swings that come with insured values and how that could affect policyholders in the event of a claim?

Susan Penwarden:

Well, we started worrying about inflation, I guess, as a potential risk I would say towards the middle of 2021, and we set up a task force inside Aviva in order to monitor that and understand the trends and everything else that was going on. At the same time, we started talking to our brokers through a number of different communication methodologies, whether it’s through letters and other things we sent to them, or also our BD visits when we’re out on the road talking to our brokers, or broker conferences where we talk about what are the hot topics of the day and really educating them on, “Look, this is the trends that we’re seeing and the inflation that we’re seeing coming through values.” And the main message is, “Look, you need to be talking to your customers because there is a risk that the value of their assets is inflating faster than the values on their policies, and they may need to have their policy values increased in order to stay up to speed.”

We started with a lot of talking, then we came out with some communication in the middle of 2022 saying, “Look, we can see systemically that we need to do something. So, we’re going to make a special effort on personal lines, for example, to increase our indexation levels to be closer to the rate of inflation.” But we gave brokers lots of notice, we told them what we were going to do so that they would be aware of what was coming and to please contact us if they had any questions. So that started in the middle of 2022 with regular follow-up. We were doing the same thing on commercial lines as well.

And then towards the end of ’22 and into ’23, we could see that there were cohorts of customers who were still probably underinsured at the margins, right? Not everybody, but certain customers were definitely not where they needed to be. So then we took a more targeted approach and used some external data in order to validate where the values needed to be, and we put targeted lists together and then we started to work on those and bringing those values closer to where they needed to be. So it was in several stages, first trying to raise all the boats if you like, because we could see there was a general trend and also being really clear with our brokers about what we were doing and why we were doing it. And then taking a more targeted approach where there were customers who were more at the margin who were definitely underinsured and we were concerned about that. So we took a more targeted approach, again, communicating with our brokers as to what we were doing, when they were going to see it and what kind of impact that might have.

Curt Wyatt:

Susan, fighting inflation is a tough one, and we hear what you’re doing and it sounds like kudos to Aviva because you’ve taken a long approach to bringing this into reality. Is the challenge in addition to getting the rates correct, is the challenge also the fact that the pricing is going up for the consumer? So we’re trying to get those insured values correct, and at the same time, we’re trying to make sure that they can afford their insurance. And we know governments come along and have different approaches to this, especially around auto insurance, for yourselves at Aviva where you do a lot across Canada, how do you see that challenge unfolding here in the next, say, year or two?

Susan Penwarden:

Well, I think there’s a number of angles. So, it starts with us managing our indemnity spend internally. So, it’s how can we renegotiate with our supply chains? We find that actually we do a better job and have lower costs if we internalize more of our claims. So we have a very high, what we call internalization rate. So most of our claims are handled by our own adjusters, and we know that means that A, we turn it around faster and that also reduces cost. Plus, we’re able to manage the end-to-end transactions. So that helps us.

We also look at… Always looking at how we can improve the sources of supply that we get. We’re starting to, along with others in the market, build out our own repair shops so we can, again, manage what we’re doing in terms of cost. So looking at it from that point of view.

But when we do our pricing, we also look at customer impact. So when we’re doing our rate changes and other things, we do look at what are the rate changes we’re putting in, what is the relative cost impact for different groups of customers? And we look at that as part of deciding what the go-to market price is because we’re conscious that we need to be careful. We do need to manage in order to be able to have enough money to pay for the claims and do what we need to do, but we also need to be careful that we are charging an appropriate amount and we are balancing it across the portfolio so that we aren’t hitting customers too hard. We prefer a little and often as opposed to big chunks. It’s harder to do that in a regulated environment obviously, especially since it takes time to do filings. So from an auto point of view, we plan far ahead about when we’re going to be doing our filings, and then we try and stick to our schedule.

And we are also benefitting from particularly some of the jurisdictions which have come up with a more simplified filing route, which allows us to file smaller levels of rate, but more frequency. Again, that’s easier to absorb than having to do a great big chunky amount all at once. But we have to think further ahead. This is stuff that’s going to be with us for a while, so we have to think about the here and now, manage the pricing into the market, be conscious of impact on customer, but also be thinking further out as to how can we work with all the stakeholders to help manage the system costs and the systemic costs that a customer in the end feels in their premium.

Curt Wyatt:

And as we go through that process of checking internally at ways to be more competitive, do you feel that in addition to what you see within your organization, do you feel that the Canadian marketplace has a certain, you call it level of competition that’s fair to the consumer at this point? You’re weighing yourselves against the guys down the street all the time to make sure that you’re competing. How do you think the Canadian marketplace stacks up today versus maybe 10 or 15 years ago prior to a lot of the M&A activity? Do the consumers have as much choice as what we would hope or maybe they even have more than they had in the past?

Susan Penwarden: 

Well, I’ve been away from the Canadian market for a little while. I was in Europe for about 15 years before I came back in 2019. What I would say is, I think the Canadian market is quite competitive. I think there are new players coming in into the market regularly, whether that’s through MGAs or new startups or even insurance companies. Yes, you’re seeing consolidation. That’s not, I think, unique to the Canadian market. You’re also seeing it from other parts of the world as well. There’s some value in doing that, but I think there’s enough competition that customers have got choice. Having said that, going back to the product itself on the regulated side, I think there’d be more competition and more options if we had some more flexibility in that space. And I think that’s scenario where there’s opportunity to do more.

Curt Wyatt:

And apply that data?

Susan Penwarden:

Absolutely.

Curt Wyatt:

The missing data.

Pete Tessier:

Susan, this has been fantastic. You’ve provided some amazing insight and I’m sure everyone’s going to gain a lot of perspective from what you’ve said and how Aviva’s looking at things and of course the industry. So thanks again for joining us on What’s On Dec? And we look forward to chatting with you in the future.

Susan Penwarden:

Thank you. Thank you for the opportunity. Great to speak to you.

Pete Tessier:

Well, I’ve got a lot to say because Susan provided some great information there, and I think there’s a lot of stuff, Curt, that people need to think about when it comes to underwriting or personal lines, and some of the advice they can give their clients, particularly if you’re a broker, and particularly if you’re working with your insurance companies too. First, holy smokes, inflation is real. It’s not going anywhere. And have those conversations with your companies about what to do about it and how they’re looking at inflationary targets and goals when it comes to increasing values.

Curt Wyatt:

You know, inflation’s going to hit us in many ways. You know, the obvious ones are at the grocery store, but insurance is a hidden cost and something that all Canadians have to be facing. The challenges come on the backs of reconstruction, also comes on the backs of the fact that as she talks about, car theft on the rise. The last thing we want to hear is that there’s a chain of experts taking cars off the hands of Canadians, shipping them offshore, and in turn, we’re going to see an inflation in auto rates, not because of interest rates going up or any other factors that cause inflation, but rather because of crime.

Pete Tessier:

Exactly. And it’s no secret what’s happening in a lot of the hot markets in Canada with luxury automobiles. Susan touched on it. One thing I can speak from personal experience is someone I know they had their Range Rover stolen, and how they found it was they had an air tag in it. Well, they contacted the police, and what they did was they found the vehicle and they said, “Don’t go up to it. We’re going to watch it.” And what ended up happening was the people who stole it, they went and parked it in a rather innocuous place, and they watched it for a bit to see if anyone tracked it. So then they watched the people watching it and were able to arrest them when they went to go get in the vehicle. Curt, Susan talks a little bit about the insure to value, that’s a big one, and how they’re working with their broker partners to address those shortfalls that they see in their inflationary increase that happen every year. That’s a big one.

Curt Wyatt:

It is Pete, and it’s something that can’t be ignored. At the same time, we’re going to potentially see a recession. So how does that affect things? I think it’s going to bring a lot of questions to the forefront. Consumers are going to start to feel that maybe prices should come down. Brokers are going to say that, “Well, look, the reconstruction on your home is maybe set from a year or two ago, which in that time the rates have increased, the cost of construction has gone up.” And they’re going to have to have those hard conversations, which again is bringing value to having an intermediary like a broker who can explain these things versus seeing the customer have extra stress and maybe make decisions they shouldn’t have made to try to stay ahead of their overall home costs.

Pete Tessier: 

Yeah. And that ties into another thing Susan brought up, and that was Cat losses. And when we think Cat losses, we think she’s talking about smoke in the summer and those kinds of things, but Cat losses are not necessarily forest fires that wipe things out. They are large catastrophes that can be in isolated areas. We’re seeing severe hail in a number of areas of the country right now. That’s having a massive impact because these hailstorms are so ferocious, the hail is bigger, they’re hitting regions and moving, and that’s a big issue too. Customers need to be aware of what’s driving some of these costs and the frequency with which they happen. Understanding the weather patterns in your area. Southwest Ontario has been particularly bad. We know Alberta has very inclement weather, and the Prairies has always been a wildcard. So there’s many areas in this country that are getting hit. And again, we had another hurricane come and hit Nova Scotia almost in an identical time as the year before. It’s a real threat to insurance rates and some of the problems we have.

Curt Wyatt:

It’s good to hear our leading insurers in Canada spending time and energy on issues relating to weather. I mean, we can’t change the weather as the saying goes, but we sure can help manage and give people tools to better manage situations as they come up. I was sitting with an adjuster from Aviva actually at the RIMS Conference, and we talked about the fact that the East Coast is getting hit by hurricanes and the tools that they’re using to mitigate losses now that that’s becoming a more common event versus what they saw a year or two ago when it was a bit of a surprise to see that much water show up at all at once.

Pete Tessier:

Yeah, look, personal lines is the bread and butter for many brokerages and insurance businesses in this country. You can’t wash it off with the glamour of, with the sweet smell of perfume from higher value commercial clients or other entities. You’ve got to consider your personal lines customers, and it gives you the best way to refine your experience. I think Susan brought a lot of elements into this, so how brokers and insurance brokerages and companies can find ways to interact with their teams and provide value to customers. That’s a big thing. We’re always looking to do it. So thanks again everyone for another great episode of What’s On Dec? We’ll see you soon.

Outro: Thanks for listening to What’s On Dec? The Canadian Underwriter podcast.