How AI is directing M&A activity in Canada’s P&C industry

Artificial intelligence explains some of the mergers and acquisitions activity in Canada’s property and casualty industry, a member of Swiss Re’s board of directors, Karen Gavan, said in Toronto Tuesday.

“We know this has to be a business of economy of scale,” Gavan replied, when asked about M&A activity in Canada at the reinsurer’s 40th annual Canadian Insurance Outlook Breakfast. “If you’re going to invest in AI to improve your processes, you have to be big. You can’t afford the investment unless you have scale, so absolutely essential.

“[For] the other part of AI, predictive analytics, you’ve got to have data. And the more data, the richer you are, and so you need both. And so it’s absolutely necessary to have consolidation. But I think…overall, it will be positive for the industry.”

Keynote speaker John Dacey, a former Group CFO of Swiss Re, discussed the importance of insurance companies stepping up to invest in AI. After his talk, Gavan made her remarks about AI investment being a driver of M&A activity in Canada. She was later asked about market concentration, to which she replied Canada still has a lot of room for M&A without disrupting choice for consumers.

“Certainly, going down to one or two companies, it’s not ideal,” she said. “But if we can have a good number of consolidated companies in the five to eight range, it will make a stronger industry.

“From a reinsurance perspective, having everyone consolidated, it’s a little tough for us. But I think it’s better for the Canadian industry if there is that consolidation.”

Dacey said Canadian P&C insurers needed to be aware of four main global influences on Canada: AI, energy costs, global inflation and interest rates, and the rise of private credit.

Speaking about AI specifically, Dacey said Canadian insurers should be thinking about investing in AI solutions “yesterday.”

“On the P&C side, [AI] is more clearly having effect as people think that value chain through,” Dacey said. “Removing human bias from underwriting. Making sure that the most recent data gets put, not just into your models, but your pricing. And most importantly, figuring out ways to bring new data that’s never been utilized for underlying commercial risks in particular, personalized risk maybe, into a price environment.”

P&C insurance companies successfully using AI will see two things happen, Dacey said.

“One, they will avoid some of the worst risks,” he said. “Not all of them, you can never avoid all of them. But you can clean up your portfolio before the experience of a loss.

“And you can also figure out a way to shape prices …to get some of the best risks your competitor has in your portfolio.

“And that combination on the margin, improving your combined ratio by a point, maybe two over time, is worth a lot of money.”

Plus, Dacey added, companies will need to use AI’s predictive analytics to help consumers, and also to help the distribution channel serve customers. Because if they do not, the broker distribution channel will develop AI models themselves.

“If you don’t do that on the distribution side, the intermediaries will also be coming out in front of you. And they’ll be directing risks in ways that benefit them, and who’s making the highest commissions.”