Organic growth has been difficult in the Canadian P&C industry because of weak investment returns caused by low interest rates. Further squeezing insurers’ profit margins, claims costs for Canadian insurers have reached more than $1 billion for the past four years running.
To generate premium and revenue growth, insurers and brokers are expected to keep up a steady stream of acquisitions in 2013. And with the values of brokerages currently pegged at multiples of anywhere between 2.5 and 4, the broker channel can expect further consolidation.
“I think you will continue to see consolidation of the brokers,” said Doug McPhie of Ernst & Young in Canada. “Certainly there’s been a lot of consolidation going on with the MGAs on the life side.”
Canada’s broker channel has seen a revenue growth of 1.3% over the past five years, with collective revenue of $9 billion, according to a report by IbisWorld. Meanwhile, Canadian insurers have struggled to grow, writing$40.3 billion in premium in 2012 as opposed to $36.7 billion in 2011.
Canadian insurers have seen profit margin tighten, based on the ongoing poor investment environment and claims payments topping $1 billion over the past four years in Canada. As a result, insurers will “need to focus their efforts in 2013 on positioning their companies for growth,” Ernst & Canada says in a 2013 report on the outlook of the country’s P&C industry.
It’s an open question whether consolidation of the market will help or hurt brokers.
McPhie said consolidation between insurers “can be an opportunity for the brokers,” in the sense that a merger can introduce a broker force to the offerings of a new carrier. “Brokers that might be dealing with one insurer might now have a greater suite of products to offer their customers,” he said.
On the other hand, it might also lead to greater market concentration, reducing the choice of insurance markets available to provide coverage for a broker’s client.
Dan Danyluk, CEO of the
Insurance Brokers Association of Canada (IBAC), observed that international trends related to solvency could result in higher capital demands made of smaller insurers in Canada.
“We have some great smaller insurers in Canada, who do tremendous service,” he said. “They are in communities that perhaps sometimes are not as attractive to larger insurers. They are very close to the bone, and I think for some of those people, you have the same demands of overhead as a large organization, but fewer resources, and they might be more challenged in the future.”
This situation may contribute to more consolidation, since companies with greater financial strength are in a position to buy up smaller companies that could use the capital infusion. They can also buy bits and pieces of companies and/or their distribution channels.
“Acquisitions are a way for insurers not only to increase revenue but to grow and diversify exposures — via new products, new distribution networks and an expanded geographic presence,” Ernst & Young’s report said.
“Yet, insurers should not consider such transactions solely in the context of large multinational takeovers — acquisitions span a wide spectrum, including a merger with another company or acquiring specific individuals or teams of employees to expand and improve product and/or [broker] distribution capabilities.”
Brokers can expect to see more consolidation in Canada’s property and casualty industry in 2013, as insurers and brokers seek to increase market share in a low-growth economic environment.
