If the recession hits, what specialized ranges will create problems for brokers?

Consumers react in predictable ways to a sluggish economy – they cut spending. While Canada posted annualized gross domestic product (GDP) growth of 3.3% in the second quarter of 2022, this figure was lower than analysts’ forecast of 4.4%, and the July real GDP figure decreased slightly by 0.1%.

Which means economists’ long-held recession predictions are getting closer to reality. If the Canadian economy slips, specialty lines related to discretionary consumer spending would become vulnerable, said Chris Mutcheson, partner and national head of the FINEX-Financial & Executive specialty products unit at brokerage Purves Redmond Ltd.

“The tourism industry has been completely crushed [during the pandemic],” he said. “We thought tourism [after the pandemic] would help open airlines, hotels, bed and breakfasts, anything related to restaurants and the service industry. But we are about to enter a recession…so we are facing almost the same scenario, but different factors on how we got there.

Meanwhile, reports from Canada’s major banks show weakening housing markets due to a combination of uncertain job prospects and higher interest rates. A recent RBC housing report predicted a drop in home resales of almost 23% this year and 15% next year.

This is important since real estate cycles are indicators of consumer confidence in spending, which in turn can affect the fortunes of various business industries that buy insurance based on income, observed Tyler Averill, vice-president Senior President of National Sales at Gallagher Canada.

“The housing market is probably a good leading indicator…and if it pulls back, it’s probably a leading indicator for other markets that will follow,” he said.

“I don’t know if the companies are going to withdraw their [insurance] spend directly. I don’t know if they will reduce the amount of their coverage or if they will necessarily want to reduce the limits they have. But I think our work as brokers is going to stay ahead of [any] changing business needs.

And don’t expect cyber to rebound anytime soon, either.

For Averill, the conundrum is that more companies are now interested in buying the cyberproduct because they better understand its value. At the same time, the hard cyber market makes it difficult to afford.

These rising costs are prompting some boards to consider self-insurance, said Marc Major, head of industry and specialty placement at Marsh Canada.

“The specialized cyberline is increasingly being challenged,” he said, “almost to the point where the question on most boardroom desks these days is, ‘Are we taking even worth buying this? What are we really buying in the end if it doesn’t protect the risk we care about the most? »

Mutcheson thinks the cyber product is fundamentally flawed, in part because cyber insurers cover both first-party and third-party costs for companies subjected to ransomware attacks.

First-party costs are those incurred by the business to recover from an attack – such as restoring computer systems, hiring public relations experts to restore the business’s reputation, legal fees, regulatory actions and compliance. Third-party costs relate to the defense of lawsuits brought by third parties who have been impacted by a business’ downtime.

Some brokers have said cyberlines could break down into sub-specialties – one for first-party costs, for example, and another dealing exclusively with liability.

“When it comes to ransomware, obviously this is first-party exposure where you’re spending $100 million to protect your infrastructure and your balance sheet,” Major said. “I don’t think the insurance market is currently specialized enough to understand this exposure.”

As COVID-19 triggers staffing crises in hospitals and long-term care homes and causes emergency room closures across Canada, many brokers see a recession negatively affecting professional lines of accountability of health and the capacity to cover long-term care.

But the long-term care insurance market is showing signs of slowing, with some ability to return to the market post-pandemic, said Mona Krolak, senior vice president of HUB International HKMB Ltd. She attributes the market improvement in part to a delay. hospital infection control policies in long-term care facilities.

Insurance company underwriters are now looking to see if those screening procedures are being followed in long-term care facilities, she said. They will ask if there are enough staff to care for those present and what risk management protocols are in place to prevent the spread of COVID-19.

“I always say to underwriters, ‘You have a much better risk today than two years ago, even with the lifting of [pandemic] restrictions,” Krolak said. “As long as the houses are functioning properly and following all the procedures and all the protocols that have been put in place over the last two years, I think that will be reflected in [reduced] loss rate.

This article is excerpted from an article that appeared in the August-September issue of Canadian underwriter and includes files by Alyssa DiSabatino. Featured image by iStock.com/Hispanolistic