New P&C insurer on Canadian sceneBy Reynaldo Marquez | June 19 2005 03:39PM
Arch Capital Group, a Bermudan property and casualty (P&C) insurer, recently launched its new Canadian subsidiary, Arch Canada. Unlike the competitors that see the Canadian market as saturated, this insurer believes there’s room for more.
Arch Canada is determined to become a major player in the Canadian P&C industry, Peter Talacek, regional vice-president, executive assurance, for Arch Canada, told The Insurance Journal.
“We aim to be a significant player in the Canadian marketplace, but we are not aiming to be the Wal-Mart of insurance. We want to participate in the larger tougher risk profile accounts in Canada. But it doesn’t mean we are going to be all things to all people. We cannot do that and don’t want to do that,” Mr. Talacek explained.
Sheldon Rankin, former president and CEO of Marsh Canada, will oversee the company’s Canadian operations from his Toronto headquarters.
Arch Capital Group is a firm specializing in P&C insurance and reinsurance. Outside of Bermuda, the company operates in Europe and the United States.
Arch Canada is mainly targeting a clientele of large companies active in natural resources such as forestry, mining and oil and gas. The insurer has also set its sights on large financial institutions and technology firms.
What market share is Arch Canada aiming for? “If you exclude personal lines of home and auto, there is somewhere between a $9 to $11 billion P&C premium pie to go after. So even a 5% market share would represent an annualized GWP (gross written premiums) of $500 million,” Mr. Talacek answered, without disclosing a specific market share.
He added that few Canadian players boast a market share this large.
Foresees strong growth
On top of that, he foresees growth for Arch in Canada in the tens of millions of dollars per year. “We will have a much better idea by the end of the year. But there is significant growth planned,” Mr. Talacek confirmed.
Although Arch Canada has obtained permits from the regulatory authorities to launch activities in all Canadian provinces, including Quebec, the company has no immediate plans to establish a foothold in Quebec, Mr. Talacek noted.
The Arch Insurance Group stock is traded on NASDAQ in the United States. Shareholders anticipate an annual return on equity (ROE) of at least 15%, Mr. Talacek explained. “There are start-up costs that need to be amortized, but after, our goals could continue to be 15% or greater,” he said, without elaborating on the company’s costs, budgets and reserves.
According to the 2004 annual results, the insurer’s direct premiums written in the United States climbed by 13.7% from the previous year to stand at $3.7 billion. Arch’s ROE was 16.2% and its combined ratio was 92.1% for that year.
Instead of igniting a price war, Arch plans to take on the market by offering products and services in traditional segments and in more specialized niches, in the hopes of luring large companies.
Above all, Arch Canada’s strategy highlights its line of liability insurance for directors and officers of large companies, Mr. Talacek explained.
Incidentally, he manages this division, which includes an errors and omissions line and fidelity insurance.
“We are going to be focusing on something that is near and dear to my heart and that is very front and centre in the D&O (directors and officers) insurance side of things. It is something I call contractual integrity,” he continued.
He is dismayed with business practices in Canada in this sector. Contracts are being signed before all the conditions have been duly met by the parties, he said.
Historically, the industry has been negligent in ensuring contractual integrity, he continued. When you write business, sign contracts and define professional standards and timetables, it is crucial that nothing be left to chance, he explained. “We know that our clients value that and it’s not being provided consistently, certainly not at the level it needs to be in Canada.”
Room for new players
The movement over the last couple of years of insurers changing their limits management strategies has paved the way for new players to enter the Canadian D&O liability insurance market, Mr. Talacek said.
Before any of the financial scandals involving companies like Enron, Hollinger and Cinar, some insurers were ready to grant large companies coverage up to a $25 million limit.
“For example, four years ago you would have a company buy $100 million worth of protection that would be split across 4 layers of $25 million. Today, in order to complete that same $100 million program, you might need 6 to 8 markets. So there are opportunities for new players to enter the Canadian market on those primary and excess basis in my opinion.”
For the first six months of operations, Arch Canada plans to concentrate on writing risks on the excess portion of D&O liability insurance coverage for targeted companies.
Products intended for primary level coverage will be marketed later, Mr. Talacek said.
A similar development strategy will be applied for the three other divisions of Arch Canada, which will attack other classes of P&C insurance risk, such as property insurance for large natural resources companies.
More to come
“We are entering the Canadian market with four units. Additional business units and products will follow. We will bring them to market over time on a prioritized basis, based upon perceived need for those products in the Canadian market, as well as pre-existing capabilities and skill sets and appetites we may have for those products.”
Adapting pricing to the reality of the Canadian market to ease penetration is another priority, Mr. Talacek said.
He added that most insurers active in Canada are subsidiaries of American companies and to a lesser extent European companies.
“In my opinion, the rates are U.S. rates with a Canadian discount factor, as opposed to entering the Canadian market, developing a book of business and products, and pricing those products according to the Canadian experience. That is what we are trying to do.”
He adds that he believes regulatory authorities are not doing a good job of collecting or transmitting information to the public, which prompted Arch Canada to conduct its own research. All the players in this sector rely mainly on data compiled by the heavyweights, including AIG Canada, he said.
Arch Canada has distribution agreements with the largest P&C brokerage firms, including Marsh Canada, Aon and Hunter Keilty Muntz & Beatty. The insurer also has its own P&C insurance brokerage arm, Mr. Talacek pointed out.
One factor that drew Arch to Canada is that Canadian brokers approached Arch in the United States, asking for help writing certain risks, Mr. Talacek noted. Because Arch was unlicensed in Canada, it was complicated to legally and properly do this. Opening its own Canadian operations has solved this problem.