Ottawa-based Encon, a significant provider of professional liability insurance, is leaving the life agent and broker errors and omissions (E&O) insurance market. Citing untenable regulatory pressures, rising claims costs and insufficient profits, the company has ceased renewing policies.
Encon will fully withdraw from the life agent and broker E&O insurance market by the summer of 2003. The departure marks a second company leaving the market. The first to leave, less than a year ago, was The St. Paul Companies.
A policy renewal notice for Desjardins Financial Security agents obtained by The Insurance Journal said the insurer had over $30 million in life/ mutual fund E&O claims filed in the space of just a few months. Encon was impacted less severely, but still incurred unacceptably large losses in relation to premiums booked, according to the document.
Dan Guernon, Senior Vice-President responsible for the life agent portfolio at Encon, says the claims experience at the company was part of the reason for pulling out of life agent E&O insurance.
Another important factor in the decision, adds Mr. Guernon, was the regulatory environment. Although the rules were designed by the provincial regulators to protect consumers, they in fact hamper the capacity of insurers to adjust their policies to market realities.
“Regulators are working from the consumer’s point of view. They may not be seeing the insurer reality. In a way we are at opposite poles,” he says. Regulations need to be loosened to limit the accumulated risk faced by E&O insurers. High current minimum and aggregate coverage requirements are creating a situation where the overall risks faced by insurers are untenable, Mr. Guernon explains.
Grant Swanson, the Director of Licensing and Compliance at the Financial Services Commission of Ontario (FSCO) does not see why Encon would lay blame on regulations. Current requirements have been in place for seven years, he says, and this is the first time a company has suggested that profitability was affected by regulations.
Nevertheless, the severity and the frequency of claims have been rising, says Mr. Guernon. Normally, he says, the company would have mitigated an increased frequency of claims by raising the deductible amount on claims. In this case, it could not do so because provincial regulators put a cap on the deductibles charged.
Raising premiums might have been another solution, states Mr. Guernon, but that was not viable, as it seemed the market has had its fill of premium increases. Encon did not think agents would be willing to shell out much more for their coverage.
The result, says Mr. Guernon, is that the company could find no feasible way of continuing operation in this sector. It will continue with its other lines of business.
The departure of Encon will further reduce competition in the life agent and broker E&O insurance market. Encon has about 20% of the market. It insures, among others, the Independent Life Insurers Brokers of Canada (IFBC) and Desjardins Financial Security.
Employer’s Reinsurance Corporation (ERC) currently has about 50% of the market, and its expectation is that it will likely get the bulk of the business left behind by Encon.
Rich Kasyjanski, Marketing Leader for Specialty Insurance Segments at ERC is very frank about his company’s prospects. He acknowledges there are few remaining players in the life agent and broker E&O insurance field, saying, “It is reasonable to assume that the business will come to us. Where else will they go?”
Mr. Kasyjanski notes that the events currently coming about were actually foreseen by the company back when it first took over the Canadian Association of Insurance and Financial Advisors (CAIFA) plan. He says the company is satisfied with its experience to date, and that further price adjustments are unlikely as most adjustments were already made when the insurer.
Other companies still operating in the life agent and broker E&O insurance field include Liberty International Underwriters, Axa Canada, ACE INA Insurance, and London Guarantee, which was bought by The St. Paul Companies in March 2002. The London Guarantee is the current E&O insurer of the Canadian Association of Financial Planners (CAFP), which has about 3000 members and is potentially merging with ERC insured CAIFA. It remains to be seen which insurer will be retained should the merger go through.
It is difficult to say what the final impact of this E&O market upset on life brokers and agents will be. Some are predicting continued increases in premium costs, and others are signalling that the situation is rapidly degenerating to a level where drastic changes will be needed.
Many associations, such as CAIFA, and the IFBC, have attempted to set themselves apart by securing group E&O plans deemed cheaper or more comprehensive. With fewer plan insurers available, the odds are good that the distinctions may lessen.
David Barber, President of the IFBC, says he is not overly worried the E&O insurance situation will unduly affect membership, but he does acknowledge that there are changes necessary. His group renewed its E&O policy at the start of July for a one-year period with Encon.
Mr. Barber affirms the situation for E&O insurers is dire. He also recognizes that the poor economy of late has contributed to an increase in what he calls “nuisance suits,” where smaller claims are arising as individuals attempt to recoup losses by whatever means. “When you get claims for just $5,000 to $7,000 you know it’s just nuisance stuff,” he contends.
Mr. Barber agrees the regulatory environment is stifling, saying that the market itself is being dismissed. “If regulators are not prepared to consult with insurers and ensure that the market continues,” he predicts, “then they will have to create something. The government will have to step in with their own plan, which means that consumers will pay just to protect themselves!”
That will not happen, says Mr. Swanson of FSCO. He notes insurers can always and usually do control their costs through reinsurance. In Ontario, he points out, reciprocal insurance exchanges insure all risks.
Mr. Swanson says FSCO is not overly concerned with the growing monopoly by ERC. E&O insurance is a dynamic and cyclical market, he says. Where opportunities exist, other companies will enter, and premiums will readjust.
In the meantime, says Mr. Swanson, continuing education and new proficiency programs such as the Life Licensing Qualification Program (LLQP) will help in diminishing the level of claims.